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63d  Congress  \  avKAT'v  /        T)oc.  No.  380  I 

M  Session      S  btii\AX&  \  Parts  I,  II,  and  III     j 


AGRICULTURAL  CREDIT 


LAND-MORTGAGE  OR 
LONG-TERM    CREDIT 


REPORT  OF 
THE  UNITED  STATES  COMMISSION 

TO 

INVESTIGATE  AND  STUDY  IN  EUROPEAN  COUNTRIES 
COOPER.\TIVE  LAND-MORTGAGE  BANKS,  COOPERA- 
TIVE RURAL  CREDIT  UNIONS,  AND  SIMILAR  ORGANI- 
ZATIONS AND  INSTITUTIONS  DEVOTING  THEIR 
ATTENTION  TO  THE  PROMOTION  OF  AGRICULTURE 
AND  THE   BETTERMENT  OF  RURAL  CONDITIONS      :: 

(IN  THREE  PARTS) 

PARTS  I,  II,  AND  III 

WITH  LEGISLATION  SUGGESTED 


PRESENTED  BY  MR.  FLETCHER         ^...„«.— ,^_ 
January  29,  1914. — Reierrcd  to  the  Committee  on  BaaBicgand  Currency  ■'C'v.%, 


—   — —  — ~jr~:^o J        o      *_ 

and  ordered  to  be  printed        r   ^  'Vt\ 


■fOon    -  { 


IT*' 


LETTER  OF  TRANSMITTAL. 


UNITED  STATES  COMMISSION  "tO  INVESTIGATE  AND  STUDY  IN  EURO- 
PEAN COUNTRIES  COOPERATIVE  LAND-MORTGAGE  BANKS,  COOPERA- 
TIVE RURAL  CREDIT  UNIONS,  AND  SIMILAR  ORGANIZATIONS  AND 
INSTITUTIONS  DEVOTING  THEIR  ATTENTION  TO  THE  PROMOTION  OF 
AGRICULTURE    AND   THE    BETTERMENT    OF   RURAL    CONDITIONS." 

Washington,  D.  C,  January  29,  IOI4. 
To  the  Senate  and  tlie  House  of  Representatives: 

Wo  have  the  honor  to  submit  herewith  Parts  I  and  II  of  the  report 
of  the  United  States  commission,  appointed  by  the  President  and  au- 
thorized by  an  act  approved  March  4,  1913,  ''to  investigate  and  study 
in  European  countries  cooperative  land-mortgage  banks,  cooperative 
rural  credit  unions,  and  similar  organizations  and  institutions  devot- 
ing their  attention  to  the  promotion  of  agriculture  and  the  better- 
ment of  rural  conditions"  and  "to  submit  a  report  to  Congress  as 
early  as  practicable  embodying  the  results  of  its  investigations  and 
such  recommendations  as  it  may  see  fit  to  make."  Parts  I  and  11 
relate  to  land-mortgage  or  long-term  credit.  Part  III,  relating  to 
personal  or  short-term  credit,  will  be  submitted  to  Congress  at  an 
early  date. 

The  information  and  evidence  relating  to  agricultural  cooperation 
and  rural  credit  in  Europe  secured  by  the  United  States  commission, 
in  cooperation  with  the  American  commission  assembled  under  the 
auspices  of  the  Southern  Commercial  Congress  as  provided  by  law, 
was  ordered  printed  as  Senate  Document  No.  214  on  Octol)er  20, 
1913. 


Respectfully, 


Duncan  U.  Fletcher,  Chairman. 

Ralph  W.  Moss,  Vice  Chairman. 

Thomas  P.  Gore. 

Harvie  Jordan. 

John  Lee  Coulter,  Secretary. 

Kenyon  L.  Butterfield. 

Clarence  J.  Owens. 


451643 


CONTENTS. 


PART  I. 

Page. 
Introduction 7 

PART  I'l. 

Land-mortgage  or  long-term  credit 13 

Description  and  analysis 15 

Explanation  of  suggested  legislation 17 

Detailed  review  of  the  bill 34 

Appendix — Suggested  legislation,  text  of  the  bill 51 

PART  III. 

Personal  or  short-term  credit.     This  part  of  the  report  will  be  submitted  to  Congress 
at  an  early  date. 

5 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/agriculturalcredOOunit 


Part  L 


INTRODUCTION. 


AGRICULTURAL  CREDIT. 


PART  I. 

INTRODUCTION. 

Washington,  D.  C,  January  28,  191^. 
To  the  Congress: 

The  last  paragi-apli  of  the  act  making  appropriations  for  the 
DcpartnK^nt  of  Agriculture  for  the  fiscal  year  ending  June  30,  1914, 
approved  March  4,  1913,  authorized  the  creation  of  the  United  States 
Commission  and  defined  its  duties  as  follows: 

That  the  President  of  the  United  States  shall  appoint  a  commission  composed  of 
not  more  than  seven  persons,  who  shall  serve  without  compensation,  to  cooperate 
with  the  American  Commission  assem]>led  under  the  auspices  of  the  Southern  Com- 
mercial Congress  to  investigate  and  study  in  European  countries  cooperative  land- 
mortgage  banks,  cooperative  rural-credit  unions,  and  similar  organizations  and  insti- 
tutions devoting  their  attention  to  the  promotion  of  agriculture  and  the  betterment 
of  rural  conditions;  and  for  the  purpose  of  its  investigations  the  commission  shall  be 
authorized  to  incur  and  have  paid,  upon  the  certificate  of  its  chairman,  such  expenses 
in  the  city  of  \N'ashington  and  elsewhere  for  the  payment  of  the  salaries  of  employees, 
clerks,  stenographers,  assistants,  and  such  other  necessary  expenses  as  the  commis- 
sion may  deem  necessary:  Provided,  That  the  total  expenses  incurred  for  all  purposes 
shall  not  exceed  the  sum  of  $25,000;  and  the  said  commission  shall  submit  a  report 
to  Congress  as  early  as  practicable  embodying  the  results  of  its  investigations  and  such 
recommendations  as  it  may  see  fit  to  make. 

In  pursuance  of  the  authority  conferred  on  him  by  this  act.  Presi- 
dent Wilson  named  as  the  members  of  this  commission: 

United  States  Senator  Duncan  U.  Fletcher,  of  Florida. 

United  States  Senator  Thomas  P.  Gore,  of  Oklahoma. 

Congressman  Ralph  W.  Moss,  of  the  fifth  district  of  Indiana. 

Col.  Harvio  .h^rdan,  planter,  of  Atlanta,  Ga. 

Dr.  John  Lee  Coulter,  agricultural  expert  of  the  Census  Bureau,  Washington,  D.  C. 

Dr.  Kenyon  L.  Butterfield,  president  of  the  Massachusetts  Agricultural  College, 
Amherst,  Mass. 

Dr.  Clarence  J.  Owens,  managing  director  of  the  Southern  Commercial  Congress, 
AVashington,  D.  C. 

The  members  perfected  an  organization  with  Senator  Duncan  U. 
Fletcher  as  chairman  and  Congressman  Ralph  W.  Moss  to  act  as 
chairman  in  his  absence,  and  with  Dr.  John  Leo  Coulter  as  secretary. 

Complying  with  tho  letter  of  the  act  which  instructed  the  com- 
mission "to  coo})orato  with  the  Amej-ican  Commission"  five  of  the 
members,  together  with  a  small  clerical  staff,  sailed  for  Europe 
April  26  in  company  with  tho  members  of  the  American  Commission. 

While  in  Europe  one  or  more  of  thementbors  visited  Italy,  Hungary, 
Austria,  Russia,  Germany,  Denmark,  Belgium,  Holland,  France, 
England,  Wales,  Scotland,  and  Ireland. 

Engagements  were  made  to  consult  tho  leading  authorities  in  each 
country;  and  tlirough  interviews  witli  all  classes— leading  authorities, 
farmers,  officers  and  om})loyees  of  institutions— reports  submitted, 
and  visits  to  institutions,  all  types  of  "land-mortgage  banks,  coopera- 

9 


10  AGKICULTURAL   CREDIT. 

live  rural-credit  unions,  and  similar  organizations,  and  institutions 
devoting  tlieir  attention  to  the  promotion  of  agriculture  and  the 
betterment  of  rural  conditions"  were  carefully  "investigated  and 
studied."  Every  assistance  was  given  the  commission  to  secure  all 
information  desired,  not  only  by  our  own  representatives  of  the  State 
Department  and  the  Department  of  Commerce,  but  also  by  repre- 
sentatives of  the  governments  in  the  countries  visited  and  by  private 
citizens. 

Since  returning  from  Europe  the  commission  has,  with  the  aid  of 
translators,  a  small  clerical  force,  and  other  assistants  acting  with  the 
American  Commission,  compiled,  classified,  and  edited  a  great  mass 
of  detailed  information  obtained  by  its  members  and  the  members 
of  the  American  Commission  while  in  Europe.  This  information  has 
been  printed  as  a  public  document.  Senate  Document  No.  214. 
The  conclusions  herein  presented  are  based  upon  the  knowledge 
gained  by  the  members  of  this  commission  from  personal  investiga- 
tion of  agricultural  conditions  in  all  parts  of  Europe,  from  a  careful 
study  of  the  data  and  information  compiled  and  published,  as  above 
S€t  out,  and  from  personal  knowledge  and  considerable  investigation 
of  conditions  in  the  United  States  which  should  and  must  affect  any 
proposed  system  of  agricultural  reform. 

Owdng  to  the  limited  time  at  its  disposal  and  to  the  limited 
appropriation,  this  commission  has  devoted  its  investigation  to  the 
question  of  agricultural  credit  and  to  recommending  a  plan  for 
reform  in  the  methods  of  financing  farmers  and  farm  operations  in 
the  United  States.  Various  phases  of  agricultural  reform,  including 
cooperative  purchasing,  cooperative  production  and  marketing  of 
farm  products,  and  a  study  of  rural  conditions  have  been  covered  to 
some  extent  by  this  commission  and  by  the  American  Commission, 
and  much  of  the  information  secured  during  the  investigation  into 
these  matters  is  reproduced  in  the  public  document  above  referred 
to  as  Senate  Document  No.  214.  This  commission,  however,  has 
confined  its  report  to  a  consideration  of  rural  credit,  to  sugges- 
tions looking  toward  the  creation  of  an  adequate  system  of  agri- 
cultural banks,  and  to  an  extension  of  the  facilities  offered  by  ex- 
isting financial  institutions,  so  as  to  meet  the  pressing  needs  of  our 
farming  popidation. 

Agricultural  credit  naturally  divided  itself  into  two  great  classes, 
namely,  long-term  or  land-mortgagecredit,wliichmay  be  briefly  defined 
as  "  cretlit  to  moot  the  capital  requirements  of  the  farmer,"  and  short- 
term  or  personal  credit,  which  may  bo  defined  as  "credit  to  meet  the 
ciuTent  or  annually  recurring  needs  of  the  farmer."  In  the  European 
S3^stem  of  agricultural  banks  the  distinction  between  these  two  classes 
of  credit  is  sharply  drawn.  To  meet  the  requii-ements  of  the  two 
classes  separate  mstitutions  are  j)rovidod,  differing  fundamentally  in 
their  plan  of  organization  and  operation.  These  different  institu- 
tions, however,  naturally  touch  at  manv  points.  They  have  grown 
up  by  a  slow  ])rocess,  and  have  been  adapted  and  adjusted  to  meet 
conditions  as  they  arose.  They  still  preserve  their  separate  identity, 
and  their  operations  are  largely  confined  to  their  se})arate  fields. 
Whether  the  conditions  in  our  country  demand  a  segregation  of  insti- 
tutions designed  to  meet  these  two  classes  of  credit,  as  is  the  case  in 
European  countries,  or  whether  one  class  of  institutions  can  be 
desigiHul  to  meet  both  needs,  has  been  a  matter  of  serious  considera- 
tion  and   study  by   the  commission.     The  differing  conditions  in 


AGRICULTURAL   CREDIT.  11 

Europe  and  in  the  United  States  must,  of  necessity,  have  some  bearing 
upon  any  decision  that  may  be  reached  on  this  pouit.  A  knowledge 
or  the  work  of  our  present  banldng  system  in  its  old  form  and  as 
modified  by  the  Federal  reserve  act  in  furnisliing  long-term,  or 
land-mortgage,  as  well  as  short-term,  or  personal,  credit  for  farmers  is 
also  necessary  as  a  prohminary  to  reaching  any  decision  on  tliis  point. 

In  considering  tliis  question  the  commission  has  attempted  to 
define,  in  the  first  place,  the  needs  of  the  American  farming  ])oj)ulation 
in  a  financial  sense.  As  noted  above,  a  careful  consideration  of  tliis 
point  has  resulted  in  its  defining  these  needs  as  being  two  in  number, 
as  follows: 

Fkst.  The  farmer's  capital  requirements,  by  which  is  meant  the 
need  of  the  farmer  for  large  sums  of  money  to  be  used  in  aidmg  to 
pay  the  purchase  price  of  the  farm,  in  improving  his  farm,  such  as 
erectmg  new  farm  builduigs,  draming,  irrigating  or  clearing,  or  m 
equipping  the  farm  so  as  to  bring  his  operations  to  the  highest  state 
01  efjiciency. 

The  money  needed  for  these  purposes  must  be  in  the  shape  of  a 
more  or  less  permanent  investment,  or  in  the  shape  of  loans  extend- 
ing over  such  a  long  period  of  time  that  they  can  be  graduall3r  reduced 
and  paid  off  out  of  the  increased  earnings  derived  from  the  improve- 
ments made  or  the  equipment  added  by  the  farmer  witli  the  proceeds 
of  such  loans.  This  is  generally  referred  to  as  long-term  or  land- 
mortgage  credit. 

Second.  The  farmer's  temporary  or  annually  recurring  require- 
ments, by  which  is  meant  the  money  needed  by  him  to  finance  his 
operations  durmg  the  time  that  the  crops  are  being  produced.  These 
temporary  requirements  recur  every  year  and  embrace  the  financial 
needs  of  the  farmer  for  the  purpose  of  preparmg  the  land,  sowing  and 
cultivating  the  crops,  and  harvesting  the  same.  This  is  generally 
referred  to  as  personal  or  short-term  credit.  But  the  short-term 
credit  of  the  farmer  should  be  distingidshed  from  the  shortr-term 
credit  of  the  merchant  or  manufacturer.  The  merchant  requij-es 
banking  accommodation  for  30,  60,  or  90  days,  during  which  period 
he  can  dispose  of  the  stock  acquired  and  repay  the  loan;  in  contrast, 
the  farmer  may  require  short-term  credit  extending  from  the  tune 
the  crops  are  planted  until  they  are  harvested,  and  this  may  be  fixed 
approximately  at  from  90  days  to  1  year.  After  the  crops  are 
harvested  and  stored  in  a  barn,  elevator,  or  warehouse,  the  need  of 
agricultural  banking  is  largely  removed,  as  the  financial  handling  of 
the  crops  so  stored  then  comes  under  the  province  of  commercial 
banking. 

The  questions,  therefore,  to  be  considered  resolve  themselves  into 
the  methods  of  furnishing  for  the  farmer  long-term,  or  land -mortgage, 
credit  and  short-term,  or  personal,  cretiit.  For  convenience  in  dis- 
cussing these  tAvo  systems  of  credit,  long-term,  or  land-mortgn go,  credit 
will  be  hereafter  referred  to  as  mortgage  credit,  because  such  credit 
must  necessarily  be  based  on  the  security  of  the  land  owned  by  the 
fiirmer  and  because  such  mortgage  credit  must  for  convenience  be 
again  subdivided  into  long-term  mortgage  credit  and  short-term  mort- 
gage credit,  as  will  be  hereinafter  shown.  Short-term  credit,  or  per- 
sonal credit,  as  above  defined,  w^ill  be  hereinafter  referred  to  as  per- 
sonal  credit. 

In  the  opinion  of  this  commission  these  two  general  classes  of  credit 
must  be  largely  segregated,  although  the  two  systems  will  naturally 


12  AGRICULTURAL    CREDIT. 

touch  at  many  points.  Further,  iu  the  judgment  of  this  commission, 
the  development  of  a  system  of  farm  land  banks  is  the  most 
important  and  the  })rimary  step  to  be  taken  in  order  to  improve  our 
agriculturcil-credit  conditions.  It  naturally  and  necessarily  precedes 
the  develojmient  of  personal  credit.  The  history  of  Euro])ean  systems 
has  shown  that  the  land-mortgage  banks  preceded  tlie  personal-credit 
banks.  In  this  country  it  is  urgently  necessary  to  create  a  land- 
mortgage  security  which  wUl  be  entirely  liquid  by  reason  of  having 
a  ready  market,  Vhich  will  run  for  a  long  tim.e,  which  can  be  paid  off 
in  small  ai\nual  or  semiannual  installments,  and  which  will  enable  the 
land-ownmg  farmer  to  use  most  advantageously  his  best  banking 
asset,  land,  as  the  basis  of  credit. 

In  this  part  of  the  report  the  problems  of  mortgage  credit  will  be 
first  considered,  since  definite  recommendations  have  already  been 
carefully  prepared  suggesting  important  national  legislation.  The 
problems  of  personal  credit  will  follow  m  a  separate  section  of  the 
report  to  be  submitted  at  an  early  date. 

In  discussing  the  bearing  of  the  experience  of  the  European  coun- 
tries upon  tliis  question,  special  reference  may  be  made  to  Germany 
as  an  illustration,  since  both  systems  of  credit  have  attained  very 
great  efhciency  in  that  Empire  and  remarkable  results  to  the  farmer 
have  been  secured,  doubtless  to  a  large  extent  as  a  result  of  the 
growth  of  agricultural  credit.  If  space  permitted,  tliis  comparison 
could  be  extended  to  other  countries  which  were  visited  by  the  com- 
mission to  good  advantage,  but  probably  additional  and  extended 
comparisons  would  make  this  report  too  voluminous. 

In  considering  the  conditions  in  Germany,  as  applying  to  the  con- 
ditions in  the  United  States,  the  essential  points  of  difference  between 
the  two  countries  should  always  be  borne  in  mind.  In  size  the  Ger- 
man Empire  is  about  equal  to  the  area  of  the  vState  of  Texas  after 
cutting  off  from  Texas  an  area  as  large  as  the  State  of  Alabama.  In 
population  the  Gei-man  Empire  contains  about  68,000,000  people,  or 
more  than  two-thirds  of  the  population  of  the  whole  United  States. 
In  intensive  farming  the  Germans  are  far  ahead  of  our  own  farming 
population,  and  the  average  production  in  Germany  has  increased 
greatly,  while  our  average  yield  per  acre  has  increased  but  slowly.  In 
Germany  the  population  in  a  given  district  is  largely  homogeneous, 
and  the  individual  is,  so  to  speak,  attached  to  the  soil,  the  same 
farms  continuing  in  the  same  families  for  generations.  In  this  coun- 
try such  a  condition  is  seldom  found.  In  Germany,  on  account  of 
the  limited  supply  of  land  and  the  large  population,  and  on  account 
of  the  known  productivity  of  each  piece  of  land,  the  value  of  that  land 
is  easily  ascertahied  and  varies  within  very  slight  limits.  In  this 
country  the  variations  in  value  are  very  great.  In  Germany  the 
average  farm  is  about  20  acres;  in  this  country  the  average  farm  is 
138  acres.  In  Germany  the  credit  and  resources  of  the  individual 
in  a  community  are  known  to  practically  every  other  individual  in 
that  community;  in  tliis  country  no  such  accurate  information  is 
obtainable.  In'  Germany  the  small  farmer,  his  wife,  and  children  all 
do  manual  work  on  the  farm;  in  this  country  such  a  condition  is  rare. 
In  Germany  the  people  have  been  trained  to  a  supervision  and  control 
of  their  operation  by  strict  government  regulations,  which  would  not 
be  favored  in  this  cmuitiy. 

Bearing  in  mind  these  essential  distinctions  and  considerations,  we 
may  now  consider  specifically  the  subject  of  mortgage  credit. 


Part  II. 


LAND-MORTGAGE  OR  LONG-TERM  CREDIT. 


PART  n. 

LAND-MORTGAGE    OR    LONG-TERM    CREDIT. 

DE8CEIPTION    AND    ANALYSIS. 

Mortgage  credit,  organized  into  a  special  system  of  banking,  has 
existed  in  Eiii-ope  since  tlie  reign  of  Frederick  the  Great.  Beginriing 
in  Prussia,  this  system  of  bankmg  has  grown  until  mortgage  institu- 
tions have  been  organized  under  authority  of  law  in  practically  every 
European  State.  Neither  in  method  of  organization  nor  in  detail 
of  operation  does  there  exist  uniformity  in  type.  The  banks  of  one 
country,  doing  precisely  the  same  character  of  business,  may  differ 
widely  from  those  of  another  country;  and  it  is  possible  to  find  di- 
vergent types  in  successful  operation  under  the  laws  of  tlie  same 
country.  Agricultural  conditions  do  not  vary  more  widely  in  the 
different  States  in  our  country  than  do  conditions  m  the  several 
states  and  provinces  in  Europe  where  these  banks  have  been  success- 
fully operated  over  long  periods  of  time.  Therefore,  a  careful  study 
of  European  experience  with  mortgage  banks  forces  the  conviction 
that  the  basic  principles  of  mortgage  banks  are  well  adapted  to  meet 
the  necessities  of  American  agriculture.  It  is  a  question  of  wisely 
applying  well-established  principles  rather  than  of  copying  methods 
01  organization. 

Land-mortgage  bonds. — One  general  principle  wliich  underlies  all  ^y 
mortgage  banks  of  Europe  is  the  issue  of  bonds  which  are  based  on 
the  collective  value  or  security  of  many  individual  mortgages  on  real 
estate.  It  is  the  merging  of  the  credit  demands  and  the  property 
resources  of  many  individuals,  somewhat  similarly  situated,  into 
onefmancial  transaction.  States,  municipalities,  counties,  and  other 
organized  communities  m  the  United  States  have  adopted  this 
principle.  Public  improvements  of  all  kinds  are  commonly  con- 
structed from  the  proceeds  of  bonds  issued  against  the  total  taxable 
wealth  of  a  political  division  and  aie  sold  in  the  open  markets. 
These  bonds  are  justly  popular  and  have  made  possible  the  construc- 
tion of  many  mighty  works  of  civilization. 

Similarly,  one  of  the  chief  advantages  wliich  corporate  laws  have 
conferred  is  the  cheap  credit  which  the  concentration  of  resources 
has  made  possible.  For  this  reason,  principally,  those  Imcs  of  busi- 
ness which  can  be  pursued  under  a  corporate  organization  have 
made  marvelous  growth  during  the  past  few  decades  in  the  United 
States. 

But  agriculture  is  best  adapted  to  mdividual  ownership  and 
management.  The  laws  making  possible  cheap  credit  to  political 
communities  and  to  corporations  have  been  of  no  advantage  to 
agriculture.  It  is  not  singular  that  agriculture  should  languish  in 
comparison  with  the  growth  of  those  other  lines  of  liuman  endeavor, 
but  it  is  strange  that  we  have  neglected  to  extend  the  scope  of  these 

15 


16  AGEICULTUKAL   CREDIT. 

laws  SO  as  to  meet  the  biisiiit^ss  requirements  of  farmers  whoso 
callmg  prevents  them  from  adopting  corporate  methods  of  trans- 
acting busmess. 

SJiort-tenn  and  long-term  mortgages  aiid  amortization. — Mortgage 
credit  is  generally  divided  into  short  and  long  term  loans.  This 
distmction  is  based  upon  the  duration  of  the  loan  and  also  upon 
the  method  of  repaymg  the  princijml  sum.  Short-term  loans  are 
defined  for  our  pvu'poses  as  those  made  for  a  shorter  period  than 
five  years,  the  principal  being  repayable  at  the  maturity  of  the 
loan.  All  loans  exceeding  five  yeai-s  are  classified  as  long-term 
loans,  the  j^rhicipal  sum  being  repayable  in  small  annual  or  semi- 
annual payments.  The  latter  method  of  repayment  is  technically 
known  as  "amortization."  The  issue  of  land-mortgage  bonds  and 
tlie  method  of  amortization  payments  are  the  distmctive  features 
of  European  long-term  mortgage  credit  which  should  be  preserved 
in  any  American  system  of  land-mortgage  banking.  Under  this 
plan,  the  duration  of  a  loan  is  determined  by  the  rate  of  amortiza- 
tion, while  the  interest  charge  is  fixed  by  the  market  value  of  the 
bonds  and  the  bank's  charge  for  administration.  If  4  per  cent 
bonds  aresellmgat  par  and  the  bank  charges  thirty-five  one-hundredths 
of  1  per  cent  for  admhiistration,  then  an  amortization  rate  of  fifty 
one-hundredths  of  1  per  cent  will  extinguish  the  debt  in  54 J  years; 
that  is  to  say,  the  borrower  will  pay  the  bank  a  rate  of  4.85  per  cent 
on  the  sum  borrowed  for  54^  years.  The  bank  divides  this  pay- 
ment into  three  parts;  4  per  cent  goes  to  pay  the  interest  due  on  tne 
collateral  trust  bond  which  the  bank  issued  to  secure  the  money 
which  was  loaned  to  the  farmer;  fifty  one-hundredths  of  1  per  cent 
is  applied  toward  the  payment  of  the  principal,  and  the  bank  re- 
ceives thu'ty-five  one-hundredths  of  1  per  cent  for  expenses  and 
profits.  If  the  bond  sells  below  par,  either  the  farmer  must  pay  a 
commission  to  the  bank  or  the  discount  must  be  met  by  the  bank 
from  its  admhiistration  fund;  on  the  other  hand,  if  the  bonds  sell 
above  par,  the  premium  may  go  to  the  borrower  or  to  the  mstitu- 
tion  m  the  form  of  profit.  Generally  speaking,  the  interest  rate  to 
the  borrower  is  determined  by  the  market  value  of  the  bank's  col- 
lateral trust  bonds,  generally  referred  to  as  land-mortgage  bonds, 
the  rate  to  the  borrower  rising  as  the  bond  falls  below  par,  and 
lowering  as  it  advances  above  par. 

If  the  rate  for  amortization  is  higher  than  fifty  one-hundredths  of 
1  per  cent,  the  loan  will  necessarily  be  extinguished  in  a  shorter 
period  than  54^  years. 

A  limitation  as  to  time  is  usually  fixed  by  law  as  well  as  to  the  rate 
which  the  bank  may  charge  for  administration.  In  actual  operation 
in  Europe  the  time  limitation  varies  in  general  from  30  to  60  years, 
and  the  charge  for  administration  varies  from  fifteen  one-hundredths 
of  1  per  cent  in  a  purely  nuitual  association  of  borrowers  to  tliirty- 
five  one-hundredths  of  1  per  cent  in  joint-stock  banks.  The  French 
law  allows  a  margin  of  sixty  one-hundredths  of  1  per  cent,  as  does  the 
recent  Spanish  law.  This  charge  is  computed  on  the  principal  sum 
remaining  unpaid,  and  in  long-time  loans  it  is  therefore  a  constantly 
decreasing  charge  to  the  borrower. 

These  rates  of  payment  for  interest,  amortization,  and  adminis- 
tration are  definitely  fixed  in  the  terms  of  the  mortgage  and  can  not 
be  changed  by  the  bank.     The  borrower,  however,  is  always  given 


AGRICULTURAL    CREDIT. 


17 


the  right  to  discharge  Ms  obhgaLions  at  any  interest  period  after  a 
fixe(l  time.  Tliis  period  is  commonly  designated  in  Europe  as  10 
years.  Tliis  right  is  a  double  protection  to  the  borrower.^  First, 
it  protects  the  debtor  against  any  demand  for  payment  of  liis  entire 
debt  or  an  increase  in  the  amiual  interest  charges;  second,  the  pro- 
vision for  repayment  at  pleasure  gives  the  borrower  complete  pro- 
tection against  a  general  fall  in  interest  rates.  This  will  be  a  very 
important  feature  to  American  debtors,  since  the  tendency  in  the 
United  States  will  be  toward  lower  interest  rates  for  farniers.  Under 
such  a  contract  a  borrower  could  safely  assume  a  liabihty  maturing 
regularly  over  a  long  period  of  time,  because  if  interest  rates  were 
to  fall  he  could  borrow  money  elsewhere  at  the  lower  rate  of  interest, 
discharge  his  obligation,  and  thus  secure  the  advantages  of  a  cheaper 
rate  on  money. 

Tax  exemptions. — To  place  these  collective  farm  loans  at  as  low  a 
rate  of  interest  as  the  community  is  able  to  secure,  the  securities  must 
be  freed  from  taxation.  This  principle  has  been  recognized  generally 
in  all  legislation  authorizing  the  issuing  of  bonds  based  on  the  taxing 
power.  Both  in  federal  and  in  state  borro^vhlg  such  bonds  are 
generally  freed  from  taxation.  In  the  matter  of  real-estate  mort- 
gages, however,  this  prmciple  is  not  so  generally  recognized.  In 
some  States  mortgages  are  freed  from  taxation  if  the  money  is 
loaned  at  a  rate  not  higher  than  that  specified  by  the  act  grantmg 
immunity  from  taxation.  In  other  States  only  a  certain  sum  is  re- 
lieved from  taxation.  In  each  of  these  exemptions,  the  State  recog- 
nizes that  a  low  rate  of  interest  on  mortgages  is  in  the  interest  of 
the  general  welfare. 

It  can  not  be  denied  that  taxation  by  a  State  of  the  mortgage  and 
of  the  real  estate  on  which  the  mortgage  is  predicated  is  double 
taxation.  A  farmer  can  not  with  safety  go  in  debt  for  60  per  cent  of 
the  value  of  improved  real  estate  and  pay  taxes  on  both  the  land  and 
the  mortgage.  President  Taft,  in  lus  letter  to  the  governors  of 
our  States,  asserted  that  farmers  are  paymg  higher  interest  rates 
than  any  other  class  of  business  men.  It  can  be  asserted  with  entire 
confidence  that  they  are  also  paying  a  higher  taxation  in  proportion  to 
their  property  holdings  than  any  other  class  of  citizens.  In  the 
Middle  West,  where  land  values  range  from  $100  upward  per  acre,  if 
the  land  be  mortgaged  for  50  per  cent  of  its  value,  and  if  the  mort- 
gage is  taxed,  the  debtor  owner  is  investing  $50  per  acre  and  papng 
mtcrest  on  $50  per  acre.  He  is  also  paying  directly  the  tax  on  the 
land  and  paying  indirectly  the  tax  on  the  mortgage.  Under  these  con- 
ditions— rising  land  values  and  cumulative  taxation — ^the  land  is 
slowly  but  surely  passing  away  from  resident  ownership  to  landlord 
ownership.     Farm  tenancy  is  undeniably  on  the  increase. 

Without  a  modification  of  our  taxation  laws,  however,  the  sub- 
stitution of  the  European  system  of  land  mortgage  will  materially 
increase  the  possibilities  of  taxing  fictitious  values.  Under  that 
system  the  lender  and  the  borrower  have  no  direct  relation  with  each 
other.  The  lender  creditor  does  not  receive  the  obligation  of  the 
borrower  debtor,  who  issues  his  obligation — the  mortgage — to  a 
bank,  and  this  bank  in  turn  issues  a  second  obligation — th(^  collateral 
trust  bond  or  land-mortgage  bond — to  the  real  creditor,  the  man 
who  invests  his  money.  If  all  these  values  are  taxed — the  land,  the 
mortgage,    and  'the   bond— we   will  have   increased   the   burden  of 

S.  Doc.  380,  63-2 2 


18  AGRICULTURAL    CREDIT. 

taxation,  which,  under  present  conditions,  rests  so  heavily  on  the 
ownere  of  mortgaged  real  estate. 

One  of  the  leading  purposes  of  a  rational  system  of  mortgage 
credits  is  to  enable  any  honest,  industrious  agi'icultural  laborer  or 
tenant  to  acquire,  by  a  part  payment  of  the  purchase  price,  imme- 
diate control  and  ultimate  ownership  of  a  tract  of  land,  and  thereby 
check  the  growing  evil  of  tenancy.  At  the  same  time  the  system 
should  enable  any  owner  of  agi'icultural  real  estate  to  secure  capital 
on  terms  which  will  enable  him  to  improve  his  holding  and  to  ren- 
der his  land  more  productive.  In  either  instance,  the  terms  must 
be  such  as  to  prevent  temporary  crop  failure  from  driving  the  owner 
from  his  farm  and  from  causing  the  loss  of  all  savings.  These  are 
worthy  purposes,  and  they  mil  promote  in  the  largest  and  best  sense 
the  general  weKare  of  our  Republic.  These  ends  can  not  be  attained 
in  the  highest  degree  except  by  a  recognition  of  their  public  charac- 
ter and  a  remission  of  taxation  on  the  paper  values  which  are  created, 
in  order  to  encourage  the  acquisition  of  farms  by  their  operators  and 
also  the  improvement  of  farm  properties.  The  public  retains  all  real 
values  of  property  for  taxation  purposes,  and  these  real  values  will 
be  largely  enhanced  by  the  investment  of  large  sums  of  capital  which 
will  be  attracted  to  the  farms  under  such  legislation. 

Land  titles,  exemptions,  and  foreclosures. — The  titles  to  land,  exemp- 
tions from  execution,  and  legal  processes  for  foreclosure  in  default  of 
payment  are  important  considerations  in  the  operation  of  any  system 
of  mortgage  banks.  In  Europe  the  States  usually  guarantee  land 
titles,  and  the  laws  chartering  mortgage  banks  usually  grant  special 
process  of  foreclosure.  Moreover,  there  are  usually  no  exemptions 
or  homestead  rights  which  are  granted  by  law.  The  borrower  is 
given  low  rates  of  interest,  long  time,  and  the  right  of  repayment  of 
the  principal  in  small  semiannual  amounts;  but  if  he  neglects  or 
refuses  to  keep  his  contracts  as  to  these  payments,  then  he  must 
speedily  forfeit  his  property.  There  are  no  long,  expensive  processes 
of  foreclosure.  But  in  the  disposal  of  property  by  auction  under 
foreclosure  proceedings  the  creditor  takes  only  the  amount  of  his 
debt  plus  foreclosure  expenses,  the  balance  of  the  proceeds  of  sale 
being  returned  to  the  debtor  as  his  right. 

Under  our  form  of  government  these  important  matters  are  under 
State  sovereignty  and  arc  subject  to  State  legislation.  Every  student 
of  the  subject  must  conclude  that  the  States  should  adopt  some  sys- 
tem of  State  guarantee  of  title,  as,  for  instance,  the  Torrens  system. 
It  is  against  the  best  interest  of  the  general  public  to  have  possible 
legal  disputes  over  the  ownership  of  land.  The  loss  incident  to  such 
uncertainty  falls  primarily  on  the  landowner,  but  in  the  end  this 
loss  is  transferred  to  the  general  public  because  the  food  and  shelter 
of  the  Nation  is  secured  from  the  soil.  It  is  a  recognition  of  this 
economic  fact  which  justifies  and  sustains  wise  legislation  to  promote 
the  best  interest  of  agriculture.  European  Governments  have  gen- 
erally recogiiizcd  this  fact.  The  same  may  be  said  of  Australian  and 
Canadian  Provinces.  Some  American  States  have  taken  the  first 
step,  and  the  United  States  Government  has  recognized  the  principle 
by  prescribing  the  Torrens  system  for  the  Philip])ine  Islands. 

It  is  obvious  that  a  collateral  trust  land-mortgage  bond  will  not 
become  a  prime  security  on  the  general  market  if  there  is  any  doubt 
as  to  the  ability  of  the  bank  which  issues  it  to  meet  the  required  pay- 


AGRICULTURAL    CREDIT.  19 

ments  promptly.  The  bank  can  have  but  two  sources  of  income  for 
this  purpose;  one  is  the  contract  payment  to  be  made  by  the  borrower, 
and  the  other  is  the  sale  of  the  land  in  case  of  default  of  such  pay- 
ment. In  European  countries  such  default  is  of  rare  occurrence  and 
the  sale  of  mortgaged  property  very  exceptional.  In  our  own  country, 
where  the  earmng  capacity  of  our  people  is  greater  than  on  the  Con- 
tinent, such  default,  under  similar  contract  provisions,  would  be  prac- 
tically nil;  but  the  legal  process  for  prompt  relief,  in  case  such  default 
should  occur,  is  imperative  for  the  protection  of  the  bank  which  has 
guaranteed  these  payments  to  the  holder  of  the  collateral  trust  land- 
mortgage  bond.  Herein  Ues  the  chief  difficulty  which  our  dual  form 
of  government  imposes  if  this  system  of  banks  is  to  be  organized 
under  Federal  charter. 

Area  of  operation. — These  considerations  naturally  suggest  the 
State  as  the  unit  for  the  operation  of  a  mortgage  bank.  The  laws 
of  a  State  are  uniform.  The  value  of  an  issue  of  collateral  trust  land- 
mortgage  bonds  by  a  bank  depends  on  a  correct  valuation  of  the 
mortgaged  lands;  and  long-time  loans  involve  a  supervision  or  over- 
sight as  to  the  management  of  the  property  to  prevent  depreciation 
in  the  security.  These  very^  important  features  can  be  arranged 
most  advantageously  if  the  operations  of  the  bank  be  restricted 
within  a  reasonable  area.  Moreover,  European  experience  indicates 
that  mortgage  banks  succeed  best  when  confined  to  a  limited  area. 
Our  States  approach  in  area  many  of  their  largest  nations.  Hence 
it  is  quite  certain  that  a  State  is  the  largest  political  division  against 
which  a  series  of  collateral  trust  bonds  should  be  issued  by  a  mort- 
gage bank. 

General  characteristics. — There  are  other  restrictions  whicli.  should 
be  imposed  on  mortgage  banks.  Their  resources  should  always  bear 
a  fLxed  ratio  to  their  liabilities.  The  earlier  mortgage  banks  in 
Europe  were  permitted  to  issue  collateral  trust  bonds  up  to  20  times 
the  amount  of  their  capital  and  surplus.  The  tendency  has  been  to 
reduce  this  volume  to  15  times  their  resources,  which  would  seem  to 
be  a  better  ratio.  At  this  proportion,  banks  reported  to  this  com- 
mission that  they  were  declaring  annual  dividends  at  from  12  per 
cent  to  14  per  cent,  so  that  no  just  complaint  can  be  made  on  the 
basis  of  earning  power. 

The  capital  and  surplus  of  the  mortgage  bank  should  not  be  entirely 
invested  in  long-term  mortgage  loans,  but  should  be  invested  in  other 
securities.  The  resources  of  the  bank  may  very  properly  be  advanced 
in  loans  for  short  periods,  pending  an  issue  of  its  collateral  trust  bonds, 
or  they  might  be  temporarily  invested  in  its  own  securities.  The  full 
success  of  a  mortgage  bank  can  not  be  assured  unless  a  market  is 
always  present  for  its  bonds.  The  deskability  of  a  security,  from 
an  investment  standpoint,  does  not  depend  wholly  on  the  rate  of 
income;  the  question  of  .a  ready  cash  market  at  a  fixed  value — its 
convertibility  into  cash  at  the  will  of  the  holder — is  an  important 
feature  of  an  investment.  The  land-mortgage  bond  is  an  invention 
to  render  liquid  the  value  of  real  estate;  and,  therefore,  the  bank 
which  issues  these  collateral  trust  bonds  should  bo  propaj-od  to  repur- 
chase them  when  they  are  offered  on  the  market.  Much  of  the 
capital  of  the  bank  should  be  available  for  this  pin-pose  and  should 
not  be  tied  ii]:>  in  long-tinie  loans. 


20  AGRICULTURAL    CREDIT. 

From  its  nature,  mortgage  business  is  distinct  from  commercial  bank- 
ing. In  mortgage  banks  the  money  to  be  loaned  is  derived  from  the 
sale  of  bonds,  and  the  capital  of  the  bank  is  to  be  largely  invested  in 
interest-bearing  securities.  Short-time  personal  loan  business  should 
be  avoided  or  minimized,  deposits  should  be  restricted,  either  in 
amount  or  kind.  Yet  experience  has  demonstrated  that  mortgage 
banks  should  accept  a  limited  volume  of  such  business.  The  nature 
of  their  business  dealings  with  their  clients  lead  the  latter  to  desire  to 
leave  money  in  their  care  for  short  periods  and  for  special  purposes. 
The  bank  should  collect  bills,  drafts,  and  other  similar  paper.  Thus, 
for  the  convenience  of  its  clients,  mortgage  banks  should  be  permitted 
to  receive  deposits  of  money,  but  careful  restrictions  along  this  line 
are  desirable. 

Type  of  institution . — There  can  well  be  honest  difference  of  opinion 
as  to  the  st3'le  of  corporation  which  is  best  adapted  to  promote  long- 
time rural  credit.  European  experience  can  give  but  little  help 
to  solve  this  question.  The  oldest  form  is  the  landschaft,  which  is 
a  purely  cooperative  association  of  borrowers.  Originally  the  land- 
schaft was  a  mutual  association,  in  which  the  borrowers  assumed 
an  unlimited  mutual  liability.  A  member  owning  real  estate  mort- 
gaged his  lands  and  was  given  the  amount  of  his  mortgage  in  land- 
schaft bonds  based  on  the  collective  value  of  all  the  lands  of  the 
members  of  the  association.  He  then  sold  the  landschaft  bonds  to 
whatever  customer  he  could  find.  The  association  simply  issued 
bonds  against  a  collective  security  and  delivered  these  bonds  to  the 
borrower  in  exchange  for  his  mortgage,  but  it  gave  no  assistance  to 
the  borrower  in  either  selling  the  bonds  or  sustaining  their  value  in 
the  market  after  the  sale.  The  landschaft  was  a  pure  association  of 
borrowei-s.  These  bonds,  wliUe  perfectly  sound,  were  not  highly 
liquid. 

Later  joint-stock  banks  were  established,  mth  that  alertness  which 
capital  always  displays,  accepted  the  bond  feature  of  the  landschaft, 
but  organized  a  selling  agency  to  dispose  of  the  bonds  issued  by 
the  bank  and  delivered  to  the  borrower,  supported  by  ample  capital 
to  repurchase  these  bonds  when  they  were  offered  on  the  market. 
These  banks  were  tlius  able  to  supply  the  borrower  with  the  money 
rather  than  with  their  own  bonds,  and  by  their  constant  readiness 
to  repurchase  tlieir  securities  in  the  market  rendered  these  bonds 
liquid.  Tlie  proportion  of  capital  to  the  bonds  issued  was  such  as 
to  fully  guarantee  the  soundness  of  the  issue.  This  competition  in 
turn  induced  the  cooperative  association  or  landschaft  to  organize 
selling  agencies,  or  a  banking  division,  whicli  receives  the  bonds 
issued  by  the  landschaft,  sells  them  in  the  market,  and  gives  the 
cash  proceeds  to  the  borrower.  Thus  the  business  methods  of  the 
two  extreme  types  of  banks  in  Germany  are  almost  exactly  the  same. 

It  is  to  be  noted  that  the  "new  landschaft"  associations  limit  the 
liability  of  their  membersliip,  thus  the  more  closely  approaching  the 
joint-stock  banks  in  business  methods.  The  main  differences  are, 
the  joint-stock  banks  have  a  subscribed  capital  and  declare  divi- 
dends, whereas  the  landschaft  do  not  have  share  capital  and  do  not 
declare  dividends.  Both  organizations,  however,  make  profits  and 
accumulate  surplus  funds. 

Landschaft  associations  can  loan  only  on  rural  real  estate  within 
the  province  where  they  are  chartered,  whereas  joint-stock  banks 


AGRICULTURAL    CREDIT.  21 

loan  on  both  urban  and  rural  property.  Both  types  are  in  successful 
operation,  and,  in  our  opinion,  either  type  can  bo  successfully  operated 
in  different  parts  of  this  countiy  mth  varying  degrees  of  success. 

We  recommend,  however,  as  best  suited  to  our  people,  a  bank  with 
a  foundation  share  capital  limited  to  loans  on  agricultural  real  estate 
within  a  circumscribed  area.  The  minimum  capital  should  not  be 
less  than  S  10,000,  with  compulsory  increase,  either  by  accumulation 
of  surplus  funds  or  sale  of  capital  stock  in  proportion  to  the  increase 
in  the  volume  of  its  business. 

Cooperative  hanJcs. — The  general  spread  of  cooperation  among  the 
farmers  of  the  United  States  should  be  fully  recognized  and  every 
opportunity  should  be  given  for  the  growth  of  these  cooperative 
prmciplcs.  ^  In  the  jutlgment  of  the  commission,  any  legislation 
providing  for  the  establishment  of  land-mortgage  banks  should 
authorize  the  establishment  of  cooperative  as  well  as  private  joint- 
stock  institutions.  Any  attempt  to  force  all  mstitutions  into  one  form 
would  probably  fail.  There  should,  however,  be  no  differences  in  the 
methods  of  doing  busmess,  the  only  difference  being  in  the  form  of 
organization. 

Both  types  of  institution  should  without  doubt  be  requu*ed  to  have 
a  foundation  capital.  Even  the  landschaften  have,  during  the 
last  quarter  of  a  ceaitury,  found  it  advantageous  to  have  landschaft 
banks  organized  as  sister  mstitutions.  This  follows  American  practice 
in  business  generally,  since  even  farmers'  cooperative  societies  almost 
uniformly  start  with  at  least  a  small  share  capital. 

The  American  people  are  so  thoroughly  accustomed  to  the  principle 
of  double  liability  that  no  attempt  could  advantageously  be  made  to 
reduce  it.  Mortgage  banks  organized  by  farmers  are  likely  to  be  small 
at  first  in  many  parts  of  the  country,  and  for  that  reason,  if  no 
other,  it  would  be  wise  to  authorize  these  to  assume  any  amount  of 
liability  desired  by  the  members.  Having  m  mind  the  effect  upon 
the  selling  value  of  the  bonds  in  the  open  market,  it  might  be  wise  to 
emphasize  the  advantage  of  assuming  a  much  higher  liability. 
Greater  liability  than  that  generally  approved  m  the  country  at  the 
present  time  should  not,  however,  be  required. 

The  only  difference  in  organization  prescribed  by  law  would  be: 
(1)  Cooperative  banks  would  be  required  to  limit  the  number  of 
shares  of  capital  owned  by  each  member,  while  the  other  banks  would 
make  no  limitations;  (2)  m  cooperative  banks  each  member  would 
have  one  vote  and  only  one,  no  matter  how  many  shares  of  stock  he 
owned,  while  in  other  banks  each  share  of  stock  would  have  one 
vote;  (3)  in  cooperative  banks,  after  a  small  rate  of  mterest  had 
been  paid,  the  remainder  of  the  net  earnuigs,  if  any,  would  be  dis- 
tributed among  the  patrons  on  the  basis  of  business  done,  m  contrast 
with  the  distribution  of  all  net  earnings  m  the  form  of  dividends  on 
capital  stock  in  the  other  uistitutions.  Under  the  plans  suggested, 
there  is  no  reason  why  any  group  of  farmers  in  any  county  should  not 
organize  its  own  institution  on  cooperative  principles.  It  would  also 
be  thoroughly  practicable  for  any  larger  group  of  farmers  already 
organizecl  for  other  purposes  (such  as  a  state  grange,  union,  alliance, 
or  equity  society)  to  form  a  large  central  state  uistitution  on  co- 
operative prhieiplcs,  with  all  the  strength  of  similar  institutions 
found  in  the  various  European  countries  visited. 


22  AGRICULTURAL   CREDIT. 

State  aid. — There  is  room  for  an  honest  difference  of  opmion  as  to 
the  question  of  state  aid,  if  only  European  experience  is  consulted. 
A  few  illustrations  will  suffice.  In  Austria,  the  mortgage  banks  are 
state  or  provincial  institutions  whose  bonds  are  guaranteed  by  the 
state  or  province  chartering  the  banks.  In  Hungary,  there  is  a 
compromise  between  these  two  principles,  the  State  advancing  a 
part  of  the  foundation  capital,  while  founders'  shares  were  sold  to 
secure  additional  capital.  The  control  of  the  institution  rests 
between  those  who  contributed  the  founders'  shares  and  those  who 
make  the  loans.  In  France,  the  State  gave  a  subsidy  of  $2,000,000 
to  the  Credit  Foncier,  and  gave  it  a  monopoly  of  the  long-term  mort- 
gage business.  The  remainder  of  the  capital,  however,  has  been 
raised  by  the  sale  of  stock,  and  in  all  essential  features  this  bank  is 
a  private  joint-stock  institution  with  certam  special  privileges 
granted  by  law. 

In  every  mstance  in  Europe  where  government  capital  has  been 
granted  to  establish  mortgage  credit,  the  results  have  been  favorable 
to  the  agricultural  interests  of  that  nation.  It  is  our  opmion  that 
such  aid  should  not  be  extended  in  the  United  States.  Our  farm 
property  is  computed  to  be  worth  $40,000,000,000,  and  is  rapidly 
mcreasing  m  value.  Surely  this  vast  property,  whose  value  is  as 
stable  as  the  foundations  of  our  Government,  is  sufficient  to  attract 
capital  in  ample  volume  to  improve  and  cultivate  its  area,  without 
subvention  from  our  Government  Treasury.  The  idea  of  Federal 
aid  is  always  attractive  and  commands  many  able  and  earnest  advo- 
cates; but  self-help  should  be  the  motto  of  our  new  agriculture.  If 
given  the  opportunity,  under  liberal  enactment  of  law,  the  savings 
of  our  Nation  wUl  gladly  invest  in  this  safe  field  and  reheve  the 
Federal  Treasury  of  any  necessity  to  finance  the  project.  It  is  wise 
legislation,  rather  than  liberal  appropriations  or  loans,  which  rural 
credit  mostly  needs  at  our  hands. 

dharter. — It  is  a  mooted  question  whether  these  banks  should  be 
chartered  by  the  States  or  the  Nation.  There  can  be  no  question  but 
that  it  is  a  subject  entirely  appropriate  for  the  State  legislatures.  If 
the  question  could  receive  serious  consideration  from  every  State 
and  fairly  uniform  legislation  were  to  be  enacted  without  undue 
delay,  it  is  to  be  conceded  that  this  would  be  a  happy  solution,  but 
the  experience  in  this  country  in  the  effort  to  secure  uniform  legisla- 
tion regarding  negotiable  instruments,  divorce  laws,  etc.,  has 
demonstrated  the  difficulty  of  securing  uniform  State  legislation  by 
independent  action. 

Moreover,  it  is  true  that  the  investing  class  in  the  United  States 
seems  to  place  more  confidence  in  Federal  than  in  State  supervision 
of  financial  institutions.  Whether  this  confidence  is  justified  or  not, 
the  fact  remains  the  same,  and  certainly  any  system  which  increases 
the  confidence  of  the  investor  in  the  securities  to  be  issued  is  worthy 
of  serious  consideration. 

With  48  States,  each  creating  under  its  own  laws  separate  land- 
mortgage  banks,  limited  in  their  operation  to  that  State,  or,  perhaps, 
authorized  to  operate  in  other  States,  with  each  bank  issuing  deben- 
tures based  on  valuations  made  under  its  State  laws,  with  the  reserved 
rights  in  the  States  to  amend,  alter,  or  repeal  the  charters  of  such 
banks,  and  with  the  competition  for  investment  money  thereby 
necessarily  aroused  when  the  various  State  baulks  offer  their  mortgage 


AGRICULTURAL    CREDIT.  23 

bonds  to  the  public,  as  well  as  for  other  reasons  too  numerous  to 
mention,  it  would  seem  that  as  a  practical  question  the  incorporation 
of  land-mortgage  banks  under  Federal  charter  is  desirable. 

Bonds  as  investment. — Moreover,  it  ^vill  be  conceded  that  land- 
mortgage  bonds,  if  properly  issued  and  secured,  should  be  accepted  as 
a  legal  investment  for  the  great  accumulations  now  gathered  in 
savings  banks,  in  insurance  companies,  and  in  postal  savings.  It  can 
hardly  be  hoped  that  these  land-mortgage  bonds  shall  be  recognized 
as  a  first-class  liquid  security  if  they  are  shut  out  from  these  great 
accumulations  of  money.  It  would  hardly  be  fair  to  shut  them  out 
from  these  accumulations  when'  railroad,  municipal.  State,  and 
national  bonds  can  be  used  by  the  same,  or  some  of  them,  as  an  invest- 
ment. With  varying  laws  in  the  different  States  and  with  varying 
methods  of  supervision  and  control  under  different  State  laws,  it 
would  be  extremely  dLSicult  to  have  these  bonds  recognized  generally 
as  a  proper  and  legal  investment  for  these  accumulations  and  for 
trust  lunds  or  of  funds  under  the  dh'ection  of  the  court.  But  if  these 
bonds  were  issued  by  banks  chartered  by  the  National  Government, 
which  banks  were  subject  to  a  rigid  supervision  on  the  part  of  the 
federal  officers,  a  uniformity  would  be  brought  about  wnich  would 
be  desirable,  and  the  bonds  would  be  much  more  likely  to  be 
accepted  as  a  legal  investment  for  these  funds. 

Moreover,  with  varying  conditions  and  laws  as  to  the  registration 
of  land  titles  and  as  to  conveyances,  as  to  taxation  of  mortgages  and 
as  to  methods  of  foreclosure,  it  would  become  exceedingly  difficult 
for  the  investor  to  ascertain  just  which  of  the  banks  chartered  by  the 
different  States  was  issuing  bonds  most  desirable  for  investment. 
The  necessity  for  comparing  these  differing  conditions,  and  the  very 
fact  that  differing  conditions  existed,  would  make  the  investor  more 
timid  and  would  tend  to  prevent  the  security  from  becoming  liquid. 
But,  on  the  other  hand,  the  Federal  Government,  by  authorizing  the 
creation  of  such  banks  under  federal  charter,  can  readily  impose 
conditions  and  restrictions  upon  the  operation  of  such  banks  and  can 
readily  extend  certain  privileges  to  such  banks  only  when  its  condi- 
tions are  complied  with,  thereby  tending  to  standardize  the  land- 
mortgage  bonds  issued  against  the  lands  in  any  given  State  and 
tending  to  secure  a  uniformity  in  the  laws  governing  the  registration 
of  land  titles,  conveyancing,  taxation  of  mortgages,  and  methods  of 
foreclosure. 

Land-mortgage  bonds,  when  issued  under  rigid  Government 
supervision,  form  an  ideal  kind  of  investment  or  trust  security, 
because  they  bear  a  fair  rate  of  interest,  command  a  ready  market, 
and  exhibit  great  sta])ility  of  value.  All  speculation  is  avoided  by 
restricting  mortgage  banks  to  the  granting  of  loans  to  private  owners 
of  land ;  and  when  such  loans  are  granted,  to  the  issuing  of  collateral 
trust  bonds  only  to  the  amount  of  the  loans.  The  capital  of  the  bank 
is  required  to  be  invested  cliiefly  in  other  safe  interest-bearing  securi- 
ties, and  this  remains  as  an  additional  security  to  the  holders  of  the 
bonds.  Under  these  conditions  such  bonds  are  of  the  highest  type  of 
a])solutely  safe  investment.  Their  value  in  no  wise  depends  upon 
speculative  elements  and  varies  but  little,  presenting  a  favorable 
contrast  with  railway  and  commercial  stocks  and  bonds.  Even 
English  consols  have  declined  from  113  in  1896  to  90  in  1912.  Other 
prominent  commercial  securities  have  recorded  an  even  wider  range 


24  AGRICULTURAL   CREDIT. 

in  price.     No  such  variation  in  price  can  be  found  in  any  scries  of 
mortgage  bonds  which  were  issued  under  Government  regulation. 

Such  securities  justly  merit  a  wide  investment  held  on  account 
of  their  intrinsic  worth.  The  National  Government  is  fully  justified 
in  extending  a  generous  recognition  to  these  bonds  because  they  are 
issued  to  aid  and  develop  agriculture.  All  commercial  banks,  savings 
banks,  insurance  companies,  and  other  like  institutions  should  be 
permitted  and  encouraged  by  State  and  Federal  legislation  to  invest 
their  funds  in  these  bonds ;  both  State  and  National  Governments,  as 
well  as  private  enterprises,  should  receive  these  bonds  as  approved 
collateral  in  all  transactions  including  like  securities.  The  Govern- 
ment may  not  justify  the  use  of  pubhc  funds  to  promote  purely  pri- 
vate enterprises,  but  we  are  beginning  to  comprehend  that  the 
Government  itself  is  a  cooperative  enterprise. 

Conclusions. — Day  by  day  we  are  using  the  power  of  the  whole 
people  to  do  more  cheaply  or  more  efficiently  some  duty  which 
naa  hithprto  been  performed  by  the  individual.  In  agriculture 
we  have  been  a  pioneer  people,  actively  engaged  in  taking  pos- 
session of  the  surface  of  a  great  empire.  Our  farmers  have  been 
engaged  in  the  hard  labor  of  improving  their  farms,  building  school- 
houses  and  churches,  and  constructing  bridges  and  roads  for  the 
public  welfare.  Science  has  but  recently  informed  us  that  the  fer- 
tility of  our  soils  must  be  maintained  and  where  depleted  must  be 
restored.  We  all  know  that  our  herds  of  meat-bearing  animals  must 
be  increased. 

While  it  may  be  said  that  these  duties  pertain  particularly  to  the 
individual  farmers,  it  can  be  answered  in  reply  that  farmers  have  not 
been  able  to  accumulate  sufficient  free  capital  to  meet  the  present 
situation.  Our  population  has  grown  more  rapidly  than  our  agricul- 
ture has  been  able  to  expand  on  a  scientific  basis.  It  has  been 
f)ossible  for  our  railroads  and  other  higlily  organized  industries  to 
ook  forward  to  the  future  and  estimate  the  rapidly  growing  demands 
of  the  public  on  their  services.  And  yet,  in  many  dnections,  we  can 
see  that  our  population  has  outrun  the  ability  of  our  public-service 
corporations  to  serve  them  efficiently. 

Agriculture  has  been  the  one  great  national  industry  which  has 
been  without  organization  and  has  been  absolutely  helpless  before  the 
wonderful  growth  of  our  Nation.  Therefore,  the  financing  of  our 
farms  has  become  a  national  problem.  The  savings  of  the  Nation 
must  flow  out  to  the  farms  in  order  to  put  agriculture  on  a  proper 
basis  as  compared  with  other  organized  industries.  Tliis  can  only  be 
done  by  wise  and  patriotic  legislation.  Farm  securities  must  be 
honored  by  Nation,  by  State,  and  by  individual.  Fortunately  every- 
body will  profit  by  such  cooperation.  The  investor — from  the 
smallest  creditor  to  the  largest  capitalist — can  purchase  a  security 
which  has  been  thorougldy  investigated  by  a  bank  under  strict 
Government  inspection,  and  wliich  in  addition  is  guaranteed  by  the 
capital  of  the  bank.  lie  has  secured  a  bond  wliich  is  practically  as 
sale  as  a  security  can  be.  The  o^^^ler  of  the  property  has  been 
equally  accommodated,  since  he  can  readily  secure  a  loan  on  his 
property  up  to  50  per  cent  of  its  value.  The  general  public  will 
be  greatly  benefited,  because  the  cost  of  living  will  always  be  predi- 
cated upon  the  great  law  of  supply  of  foodstuffs  produced  from  the 


AGRICULTURAL    CREDIT.  25 

earth,   and  the  volume  consumed  by  the  people  who  inhabit  the 
earth. 

There  should  be  no  hesitation,  therefore,  in  enacting:  legislation 
which  will  give  land-mortgage  bonds — which  are  the  basis  of  all 
true  long-term  rural  credit — that  favorable  position  which  is  always 
accorded  State  and  Federal  bonds,  for  both  are  based  on  the  public 
wealth  and  are  issued  to  strengthen  and  to  perpetuate  our  Nation. 

In  closing  this  section  of  its  report  the  commission  desires  to 
refer  to  the  fact  that  the  commercial  world  has  had  constructed  for 
it  a  magnificent  system  of  commercial  banks;  the  frugal  laborers 
and  savers  of  the  cities  have  their  system  of  savings  banks  and  build- 
ing and  loan  associations,  and  the  great  corporations  have  their 
trust  companies.  All  of  these  and  other  similar  financial  institu- 
tions assist  in  the  financing  of  the  agricultural  industry  to  some 
extent,  but  none  of  them  is  adequate  or  can  be  made  adequate 
to  supply  this  special  need  without  a  sacrifice  to  their  present  field 
of  endeavor.  The  commission  recognizes  that  too  great  ease  in 
borrowing  should  not  be  encouraged,  smce  this  might  result  in  an 
unreasonable  increase  in  farm  debt.  On  the  other  hand,  it  should 
not  be  forgotten  that  under  the  present  system  tenancy  con- 
tinues to  increase  and  farmers  have  outstanding  obligations  easily 
exceeding  two  billions  of  dollars  secured  by  mortgages  on  their 
farms,  much  of  Mdiich  was  negotiated  under  very  unfavorable  cir- 
cumstances and  with  ver}^  high  rates  of  interest.  It  is  believed 
that  under  the  plans  which  have  been  formulated  herein,  and  which, 
are  intended  to  be  supplementary  to  the  existing  system,  tenancy 
may  be  decreased,  the  needs  of  farmers  be  taken  care  of,  and  at 
the  same  time  the  outstanding  obligations  may  be  refunded  on 
much  more  favorable  terms  and  gradually  reduced  by  the  regular 
payment  of  small  annual  installments  impossible  under  the  general 
sj^stem  now  found  in  this  country. 

As  carrying  out  the  conclusions  reached  by  this  commission  in 
its  efforts  to  formulate  a  plan  for  the  creation  of  land-mortgage 
banks,  a  form  of  bill  has  been  drafted,  which  is  attached  to  this 
report  as  a  part  thereof,  and  which  is  respectfully  recommended  to 
the  consideration  of  Congress  as  an  outline  of  legislation  providing 
adequate  facilities  for  meeting  the  needs  of  the  farmers  for  long-term 
or  land-mortgage  credit. 


INTERPRETATION  OF  LEGISLATION  SUGGESTED  OR  A  STATE- 
MENT OF  THE  CONSIDERATIONS  WHICH  HAVE  LED  THE 
COMMISSION  TO  SUGGEST  THE  BILL  SUBMITTED  HERE- 
WITH. 

[See  page  53  for  text  of  bill. J 


GENERAL    STATEMENT. 

As  indicated  in  the  discussion  contained  in  this  report  the  commis- 
sion was  confronted  from  the  beginning  with  several  questions,  fun- 
damental in  their  character  and  requiring  decision  before  any  defi- 
nite plan  could  be  agreed  on. 

MORTGAGE    CREDIT    AND    PERSONAL    CREDIT. 

Foremost  among  these  was  the  question  as  to  whether  any  sys- 
tem of  banking  could  properly  provide  for  the  needs  of  both  mortgage 
and  personal  credit  or  whether  it  should  be  limited  to  the  former. 
Some  of  the  members  of  the  commission  were  at  fu"st  strongly  imbued 
with  the  idea  that  both  phases  of  the  problem  should  be  combined 
in  any  proposed  legislation.  A  bill  looking  toward  this  end  had  been 
introduced  in  the  Senate  by  one  of  the  members  of  the  commission, 
and  this  bill  received  the  most  careful  consideration.  But,  after 
a  more  careful  and  thorough  study  of  the  two  problems,  the  com- 
mission decided  to  draft  a  bill  dealing  exclusively  with  mortgage 
credit,  and  that  the  requirements  of  personal  credit  could  be  more 
suitably  met  by  a  separate  measure. 

The  commercial  banking  system,  as  outlined  in  the  Federal  reserve 
act,  is  essentially  a  system  designed  to  meet  short-time  credit  re- 
quirements. Unquestionably,  the  commercial  banking  bill  recently 
adopted  will  largely  extend  the  facilities  now  afforded  for  stable  con- 
ditions in  banking;  for  an  avoidance  of  the  panics  which  have  hereto- 
fore threatened  our  whole  financial  structure;  and,  through  the  s)'s- 
tem  of  rediscounting  provided,  will  provide  for  an  increase  or  decrease 
in  the  volume  of  our  currency  to  correspond  with  the  requirements  of 
business. 

These  provisions  will  benefit  the  farmer  as  well  as  the  other  great 
industrial  classes  of  the  country;  and  while  it  would  seem  that  many 
of  the  requirements  of  the  farmer  could  not  bo  provided  for  in  a  pure 
system  of  commercial  banking,  yet  it  was  felt  tnat  with  the  changes 
in  the  commercial  banking  system  the  needs  of  the  farmers  would 
be  partially  met,  while  those  not  specifically  covered  in  that  system 
could  be  best  dealt  with  through  additional  legislation. 

27 


28  AGRICULTURAL    CREDIT. 

CENTRAL    BANK    V.  INDEPENDENT    BANKS. 

A  second  great  question  which  confronted  the  commission  was  the 
question  as  to  whether  it  should  recommend  a  central  bank, 
which  alone  slioidd  issue  land-bank  bonds  based  on  mortgages 
guaranteed  by  local  institutions  and  forwarded  to  the  central  bank. 
The  arguments  in  favor  of  such  an  institution  were  elaborately  pre- 
sented and  carefully  considered.  It  was  urged,  with  great  force, 
before  the  commission  that  a  single  central  bank  of  issue,  having  a 
large  capital  and  alone  emitting  land-bank  bonds,  would  create  a 
confidence  in  the  investing  public  which  would  tend  to  miprove 
the  market  for  mortgage  loans,  which  would  standardize  the  farm 
bond  as  an  investment,  and  wliich  would  in  many  ways  redound  to  the 
interest  of  the  farmer.  The  plan  of  creating  a  number  of  small  banks, 
Umited  in  their  operations  to  subdivisions  of  the  State,  controlled 
and  operated  by  local  people,  paying  restricted  dividends  and  ulti- 
mately becoming  mutualized,  was  worked  out  in  detail  and  carefully 
considered.  The  plan  of  having  these  institutions  guarantee  the  mort- 
gage loans  made  m  the  community  and  of  forwarding  them  through 
a  State  institution  owned  by  these  small  local  institutions  (and 
which,  in  turn,  would  guarantee  such  mortgages)  up  to  a  national 
institution,  which  alone  should  issue  land-bank  bonds,  was  fully 
considered.  The  advantages  and  disadvantages  of  such  a  plan  were 
thought  to  be  worthy  of  such  serious  consideration  that  a  bill  out- 
lining this  method  and  providing  for  every  detail  of  the  operation 
of  such  banks  in  connection  with  mortgage  credit  was  drawn  up 
and  fully  discussed. 

But,  after  a  most  careful  consideration  of  this  suggested  plan, 
the  commission  was  convinced  that  this  was  not  the  best  system. 
Recognizing  the  public  sentiment  which  seems  to  exist  against  a 
central  institution  in  any  banking  proposition,  and  yet  feeling  that 
the  matter  merited  the  fullest  consideration  on  its  merits,  the 
commission  gave  to  it  the  most  careful  study.  As  a  result  it  became 
convinced  that  the  system  outlined  in  the  bill  which  it  had  formu- 
lated possessed  advantages  which  a  central  bank  plan  would  not 
possess  and  encouraged  competitive  banking  to  an  extent  that 
would  not  be  possible  under  a  bill  providing  for  a  central  institution. 

ADVANTAGES  OF  INDEPENDENT  BANKS. 

As  against  the  central  bank  idea,  the  bill  suggested  by  the  com- 
mission affords  competitive  banking.  It  is  founded  on  American 
models.  It  is  based,  to  a  large  extent,  on  the  plan  of  our  national 
banking  system,  changed  as  the  commission  deemed  wise  to  over- 
come the  difficulties  which  had  heretofore  been  shown  to  attach  to  the 
national  banking  plan.  Under  the  provisions  of  this  bill,  any  10  peo- 
ple can  organize  a  separate  and  independent  bank  with  a  minimum 
capital,  with  a  fixed  ratio  between  that  capital  and  the  volume  of 
land-bank  bonds  which  the  banks  may  issue,  and  with  an  area  of  opera- 
tions as  wide  as  the  State  in  which  they  are  organized.  Competi- 
tion is  invited  in  the  organization  of  such  institutions.  The  right 
to  organize  such  institutions  is  given  to  everyone,  and  the  greatest 
latitude  in  operation  is  afforded  that  is  thought  to  be  consistent 
with  soundness  and  safetv. 


AGRICULTURAL    CREDIT.  ^9 

STATE    OR    FEDERAL    INCORPORATION. 

The  commission  recognized  that  mortgage  credit  deals  of  necessity 
with  land;  that  the  laws  affecting  land  are  State  laws;  that  there  are 
48  States  in  the  United  States  in  which  the  laws  governing  convey- 
ancing, registration,  foreclosure,  exemption,  taxation,  and  other  sub- 
jects relating  particularly  to  land  are  under  State  control  and  differ  in 
various  particulars.  It  recognized  that  while  the  Federal  Government 
might  exercise  supervision  over  the  land-bank  bonds  issued  by  banks 
organized  mider  Federal  charter,  yet  the  problem  must  of  necessity 
be  largely  controlled  by  State  laws  and  State  requirements.  It 
beUeved  that  every  latitude  should  be  allowed  to  enable  the  incor- 
porators of  such  a  bank  to  meet  these  local  conditions  provided  that 
a  strict  Federal  supervision  over  issues  of  land-bank  bonds  and  over 
the  rules  governing  such  banks  which  were  not  affected  by  specific 
State  laws  was  adequately  provided  for. 

RECOMMEND  FEDERAL  CHARTERS  WITH   OPERATIONS  LIMITED   TO  STATE 

AREA. 

In  consequence  the  commission  has  concluded  that,  while  competi- 
tive banking  should  be  encouraged,  yet  the  loans  of  each  bank  should 
bo  limited  to  one  State.  The  land-bank  bonds  issued  by  such  a  bank, 
based  on  mortgages  or  deeds  of  trust  upon  lands  in  a  single  State, 
where  the  general  provisions  regarding  conveyancing,  registration, 
foreclosure,  taxation,  exemption,  etc.,  are  the  same,  would  form  an 
ideal  kind  of  investment  at  home  and  abroad. 

That  it  would  be  unwise  to  extend  the  area  of  loan  operations  of  a 
single  bank  beyond  the  confines  of  a  given  State  must  be  apparent. 
In  order  to  secure  the  confidence  of  the  investing  public,  the  mort- 
gages or  deeds  of  trust  held  by  the  banks  issuing  them  as  a  security 
for  their  land-bank  bonds  must  be  governed  by  the  same  general  laws. 
It  would  tend  to  destroy  the  confidence  of  the  mvestor  if  be  should 
feel  that  these  mortgages  were  subject  in  part  to  the  laws  of  one 
State  and  in  part  to  a  differing  set  of  laws  of  a  different  State.  It 
is  obvious  that  the  land-bank  bonds  of  the  banks  issuing  them  should 
be  based  on  mortgages  or  deeds  of  trust  which  are  sunilar,  certainly 
in  so  far  as  these  fundamentals  are  concerned. 

VARYING   INTEREST    RATES    IN    DIFFERENT    STATES. 

The  commission  also  recognized  that  conditions  in  the  various 
States  are  different,  that  the  rates  of  interest  paid  for  monev  vary 
in  different  localities  between  large  extremes,  and  that  the  legisla- 
tures of  the  various  States  have  recognized  these  varying  mterest  rates 
by  establishing  widely  varving  legal  rates  of  interest  on  loans.  In 
one  State  the  legal  rate  will  be  6  per  cent,  while  in  another  State  it 
may  be  as  high  as  10  per  cent,  but  the  same  legal  rate  exists  all  over 
a  given  State. 

In  view  of  this  it  could  hardly  bo  hoped  that  the  land-bank  bonds 
sold  by  a  bank  and  based  on  mortgages  in  a  State  where  the  legal 
rate  was  10  per  cent  could  be  sold  on  the  same  basis  as  similar  bonds 
issued  by  a  bank  against  mortgages  m  a  State  where  the  legal  rate  of 
interest  was  6  per  cent.  The  problem  in  some  of  its  j)hases  remains 
and  must  remain  a  State  problem  owing  to  our  dual  system  of  gov- 


30  AGBICULTUEAL    CREDIT. 

ernment.  Obviously,  any  attempt  to  force  by  Federal  legislation 
one  rate  of  interest  iu  all  the  States  would  be  futile.  The  law  of 
demand  and  supply  will  control  these  rates,  and  legislation  which 
attempted  to  enforce  a  single  rate  all  over  the  country  would  result 
in  making  it  difficult  to  sell  land-bank  bonds  issued  in  a  State  where 
the  current  interest  rates  were  higher  than  those  attempted  to  be 
enforced  through  such  legislation.  On  the  other  hand,  once  the 
system  of  national  farm-land  banks  is  in  operation  in  the  various  States 
under  Federal  law  and  the  bonds  are  recognized  as  safe  investments, 
the  tendency  would  be  to  reach  not  only  a  common  but  a  lower  level 
of  interest  rates. 

COMPETITIVE    BANKING    THE    SOLUTION. 

A  full  consideration  of  these  and  many  other  phases  of  the  prob- 
lem convinced  the  commission  tha^  the  proper  method  of  meeting 
these  various  conditions  was  to  authorize  competitive  banking  and 
to  permit  a  given  number  of  men  in  any  State  to  organize  a  banking 
institution,  with  power  to  act  within  that  State  and  subject  to 
Federal  control — mainly  in  the  way  of  supervision  and  an  enforce- 
ment of  regulations — so  as  to  prevent  the  misuse  of  the  powers 
granted.  Under  the  bill  proposed  any  number  of  banks  may  be 
organized  in  a  given  State.  Each  bank  can  extend  its  operations 
over  the  whole  or  any  part  of  the  State.  The  amount  of  land-bank 
bonds  which  may  be  issued  by  the  bank  is  fixed  at  a  sum  not  to 
exceed  15  times  its  capital  and  surplus,  so  that  the  maximum  ratio 
between  the  capital  and  surplus  on  the  one  hand  and  the  outstand- 
ing obligations  on  the  other  is  maintained.  Thereby  the  percent- 
age of  reserve  held  against  these  obhgations,  over  and  above  the  real- 
estate  security,  is  the  same  for  the  small  bank  as  for  the  large  bank, 
thus  enabling  the  small  bank  to  compete  with  the  large  bank  in 
the  sale  of  the  land-bank  bonds  issued  by  it  and  based  on  real-estate 
loans. 

INDEPENDENT    BANKS    SUITED    TO    AMERICAN    EXPERIENCE. 

Moreover,  the  commission  became  strongly  convinced  that  the  in- 
dividual institution  is  best  suited  to  the  American  people,  and  that 
the  exercise  of  governmental  activities  should  be  largely  confined  to 
a  rigid  supervision,  after  allowing  the  widest  latitude  to  individual 
effort  and  initiative.  Permission  to  organize  separate  and  distinct 
institutions  with  a  limitation  as  to  the  minimum  amount  of  capital, 
with  a  fixed  maximum  ratio  between  capital  and  outstanding  land- 
bank  bonds,  and  with  a  careful  Federal  supervision  seemed  to  be 
better  suited  to  American  methods  of  procedure  and  to  American 
experience  in  banking  than  would  a  centralized  bank  which  alone 
should  issue  and  market  land-bank  bonds  based  on  mortgage  loans. 

THE     SYSTEM     PROPOSED     PROTECTS     THE     BORROWER,     YET     ATTRACTS 

CAPITAL. 

The  banks  provided  for  under  the  bill  suggested  by  the  coramisson 
will  attract  the  investment  of  capital,  because  of  the  adequate  and 
ample  returns  which  that  capital  can  obtain.  On  the  other  hand,  the 
borrower  is  fully  protected,  because  the  amount  of  interest  which  the 


AGRICULTURAL    CREDIT.  31 

bank  can  charge  the  boncAver  is  limited  to  1  per  cent  more  than  the 
bank  pays  on  its  land-bank  bonds.  Tlie  administrative  chorijes  of 
the  bank  are  confined  to  a  given  maximum.  In  these  and  other  ways, 
the  bank  is  prevented  from  taking  advantage  of  the  borrower  and 
must  content  itself  with  a  reasonable  profit  on  each  individual  trans- 
action; while,  on  the  other  hand,  the  volume  of  the  transactions 
permitted  is  sufficiently  large  to  provide  a  reasonable  return  on  the 
money  invested  in  the  bank.  The  borrower,  in  case  of  fallmg  interest 
rates,  has  the  pri\Tlege  of  paying  off  his  loan,  so  as  to  take  advantage 
of  such  reduced  interest  charges;  and  the  whole  system  is  designed 
primarily  m  the  interest  of  the  farmer,  and  secondarily  so  as  to  offer 
a  return  on  the  capital  invested,  which  will  justify  and  bruig  about 
the  establishment  of  these  banks  in  all  parts  of  our  country  and  the 
investment  of  money  in  these  institutions. 

COOPERATIVE    INSTITUTIONS    ALSO    AUTHORIZED. 

"V\Tiile  the  commission  did  not  believe  that  the  pure  Landschaft 
as  originally  organized  in  Germany,  or  even  the  modified  Landschaft 
as  it  now  exists  in  that  country,  was  suited  to  the  conditions  and 
requirements  of  the  American  people,  it  yet  recognized  the  value  of 
cooperative  eft'ort  and  the  wisdom  of  permitting  cooperative  institu- 
tions to  be  organized.  In  consequence,  provision  is  made  in  the  biU 
for  the  organization  of  banks  on  a  cooperative  basis  wherever  desired. 
In  such  cases  the  general  principles  of  cooperation  become  applicable 
to  institutions  working  under  tnis  plan,  and  they  cease  to  be  purely 
private  money-making  organizations. 

GOVERNMENT    FINANCIAL    AID    UNWISE    AND    UNNECESSARY. 

In  considering  the  question  of  the  establishment  of  institutions 
under  Federal  charter,  naturally  the  question  of  Government  aid 
came  under  discussion.  The  commission,  from  the  beginning,  has 
been  convinced  that  not  only  was  Government  aid  unnecessary,  but 
that  it  would  be  unwise.  The  farmers  of  the  country  do  not  desire 
any  special  privileges,  and  the  idea  of  special  privilege  is,  moreover, 
antagonistic  to  the  spirit  of  our  institutions.  Government  subven- 
tion is  not  needed.  The  security  of  our  farms,  the  value  of  which  is 
reported  to  be  over  $40,000,000,000  and  yielding  an  annual  product 
of  the  gross  value  approaching  SIO, 000, 000, 000,  is  ample  for  the 
creation  of  a  Hquid  security,  which  will  be  readily  accepted  by  in- 
vestors and  which  wiU  enable  the  farmer  to  use  his  asset  of  land  as 
readily  as  the  merchant  uses  his  stock  of  goods.  The  farmer  needs 
no  special  privilege  and  wants  no  special  privilege,  and  none  should 
be  extended  to  him. 

BUT    NO    DISCRIMINATION    SHOULD    BE    MADE    AGAINST    FARM    BANKS. 

WhUe  this  is  true,  the  commission  believes  that  it  is  equally  true 
that  there  should  be  no  discrimination  against  the  farmer,  or  against 
the  bond  issued  on  the  security  of  his  land.  Inasmuch  as  the  basis  of 
our  national  wealth  lies  in  the  farms,  the  commission  has  felt  that 
land-bank  bonds  created  under  this  act  should  be  recognized  as  be- 
ing of  the  same  class  and  as  entitled  to  the  same  standing  as  the  very 
highest  grade  of  railroad  or  industrial  bonds. 


32  AGRICULTURAL   CREDIT. 

LAND-BANK    BONDS  A  PROPER   INVESTMENT  FOR  SAVINGS. 

The  greatest  accumulations  of  money  in  this  country  are  to-day 
contained  in  the  mutual  savings  banks,  in  the  great  insurance  com- 
panies, and  in  our  commercial  banks.  The  commission  has,  there- 
fore, provided  that  the  land-bank  bonds,  proposed  to  be  issued  by 
the  banks  organized  under  this  act,  should  be  placed  in  the  same 
class  with  the  highest  grade  of  railroad  and  industrial  bonds,  and 
should  be  made  available  as  legal  investments  for  all  classes  of 
savings  and  for  insurance  reserves. 

It  has  also  recognized  that  these  land-bank  bonds,  based  on  farm 
lands  at  50  per  cent  of  their  value,  are  essentially  an  investment  for  trust 
funds  and  lor  postal-savings  deposits,  and  has  provided  for  legalizing 
their  use  as  an  investment  for  trust  funds  under  the  charge  of  the 
courts,  and  for  the  savings  of  the  people  rt  large,  as  evidenced  by 
the  postal  savings  deposits.  The  commission  has  attempted  to  place 
these  bonds,  when  issued  under  Federal  supervision  by  banks  created 
under  a  Federal  act,  in  the  class  of  the  very  best  investment  securi- 
ties. It  has  attempted  to  encourage  their  acceptance  by  the  general 
public  and  by  the  average  investor,  through  the  plan  of  having  them 
officially  recognized  (as  they  should  be)  as  a  legal  investment  for  sav- 
ings, for  insurance  reserves,  for  the  money  of  widows  and  orphans 
controlled  by  the  courts,  and  for  all  those  funds  around  the  invest- 
ment of  which  the  greatest  and  most  rigid  safeguards  are  thrown. 

THE  CONTROLLING  ARGUMENT  IN  FAVOR  OF  FEDERAL  INCORPORATION. 

And  it  is  just  here  that  one  of  the  greatest  advantages  of  Federal 
incorporation  is  shown.  As  heretofore  stated,  our  48  State  sovereign- 
ties represent  a  large  number  of  differing  methods  of  conveyancing, 
registration,  foreclosuie,  taxation,  and  exemption.  The  difficulty 
of  securing  uniformity  of  laws  in  these  respects  is  obvious.  The 
efforts  that  have  heretofore  been  made  to  secure  uniformity  in  laws 
governing  negotiable  instruments,  in  divorce  laws,  and  in  other  direc- 
tions, have  shown  that  it  is  at  best  a  slow  process,  and  that,  how- 
ever wise  the  proposed  legislation  may  be,  it  is  extremely  difficult 
to  arouse  the  people  to  the  necessity  of  prompt  action. 

FEDERAL    INCORPORATION    WILL    HASTEN    AND    ENCOURAGE     UNIFORM 
STATE    LEGISLATION OTHER    ADVANTAGES. 

But,  through  a  Federal  incorporation  of  farm-land  banks,  it  would 
seem  that  this  })roblem  can  be  greatly  simplified.  The  bill  provides 
that  any  10  persons  can  organize  such  a  bank  in  a  given  State.  It 
authorizes  the  banks  so  organized  to  issue  land-bank  bonds  agamst 
mortgages  in  that  State.  It  gives  to  every  such  bank  organized  the 
same  general  powers  and  makes  them  subject  to  the  same  general 
restrictions.  But  it  goes  further  and  provides  that  the  supervisory 
officer  of  the  Federal  Government  may,  by  general  rules,  permit 
the  land-bank  bonds  issued  by  such  banks  to  bo  used  (1)  as  security 
for  the  deposit  of  postal  savings  funds,  or  (2)  as  a  legal  investment 
for  funds  accumulated  as  time  deposits  in  national  banking  asso- 
ciations, or  (3)  as   a  legal   investment   for   trust   funds   under  the 


AGRICULTURAL    CREDIT.  33 

charge  of  United  States  courts,  or  in  other  ways,  provided  (1) 
the  laws  governing  registration,  conveyancing,  ancl  foreclosure 
are  simplified,  or  (2)  provided  exemptions  as  regards  farm  mort- 
gages are  abolished,  or  (3)  provided  such  land-bank  bonds  are 
made  available  as  legal  investments  for  savings  funds,  insurance 
reserves  and  trust  funds  iii  that  State.  The  object  of  these  provi- 
sions is  to  encourage  the  passage  of  laws  which  will  bring  about  uni- 
formity in  State  methods  of  conveyancing,  registration,  foreclosure, 
taxation  and  exemptions,  and  which  vdW  induce  the  States  themselves 
to  recognize  these  land-bank  bonds  as  legal  investments  for  savings- 
bank  funds  and  trust  funds  under  their  control,  thereby  fixing  their 
status  as  high-class  investment  securities. 

EXEMPTION    FROM    TAXATION 

Finally  the  commission  has  recognized  that,  in  order  that  the  farmer 
shall  get  the  benefit  of  the  lowest  interest  rates,  these  land-bank  bonds, 
as  well  as  the  mortgages  or  deeds  of  trust  held  by  the  banks  as  security 
for  the  same,  must  be  exempted  from  taxation.  It  will  be  conceded 
that  the  tax  upon  a  mortgage  ultimately  comes  out  of  the  borrower, 
either  directly  or  in  the  shape  of  an  increased  interest  rate  on  the 
loan.  The  proposed  securities  are  based  on  land,  and  land  is  the  one 
asset  which  is  always  taxed  and  which  can  not  evade  taxation.  The 
farmer  must  pay  his  proportion  of  governmental  charges,  because  his 
land  is  always  there  and  the  assessor  can  always  reach  it.  The 
Federal  Government  has  no  control  over  this  tax  on  land  and  does 
not  attempt  to  control  it.  But  it  is  recognized  that  a  tax  on  the 
mortgage  created  by  the  farmer  upon  this  land  or  a  tax  upon  the  land- 
bank  bond  issued  by  the  bank  on  the  security  of  such  mortgage,  must 
ultmiately  be  paid  by  the  farmer  in  the  shape  of  increased  interest 
charges.  As  an  essential  to  the  carrying  out  of  any  reform  which 
wOl  meet  the  farmer's  requirements,  this  species  of  double  taxation 
must  be  done  away  with.  Consequently,  the  bUl  provides  for  the 
exemption  from  taxation  not  only  of  the  capital  stock  of  the  banks 
to  be  so  organized,  but  also  of  all  the  mortgages  and  deeds  of  trust 
held  by  the  bank  and  of  all  the  land-bank  bonds  issued  by  the  bank 
against  such  mortgages  and  deeds  of  trust.  In  exempting  the  capital 
of  the  bank  from  taxation,  the  bill  foUows  the  Federal  reserve  act,  on 
the  theory  that  the  same  privilege  in  this  respect  should  be  extended 
to  agricultural  banks  as  to  commercial  banks.  And  in  exem])ting 
from  taxation  the  mortgages  and  deeds  of  trust,  and  the  land-bank 
bonds  issued  against  the  same,  the  commission  has  recognized  that 
such  a  tax  is  simply  an  additional  charge  against  the  farmer  who  has 
already  paid  the  direct  tax  on  his  land.  It  wiU  be  impossible  to 
secure  money  for  the  farmer  on  the  best  terms,  unless  and  until  such 
an  exemption  goes  into  effect. 

The  various  other  considerations  which  have  influenced  the  com- 
mission in  submitting  this  bill  will  appear  in  the  detailed  discussion 
which  follows. 

S.  Doc.  380,  63-2 3 


DETAILED  REVIEW  OF  THE  BILL. 

[See  page  53  for  text  of  bill.) 


Section  1  creates  a  short  title  which  is  essentially  descriptive,  and 
which  indicates  the  principal  object  of  the  bill. 

Section  2  creates  a  bureau  ui  the  Treasury  Department  for  super- 
vising the  operations  of  these  banks.  The  bureau  is  to  be  headed  by 
a  commissioner  of  farm-land  banks,  whose  position  and  duties  largely 
correspond  to  those  of  the  Comptroller  of  the  Currency  in  commercial 
bankmg.  The  commissioner  oi  farm-land  banks  is  under  the  direc- 
tion of  the  Secretary  of  the  Treasury. 

Section  3  provides  for  the  appointment,  the  term  of  office,  and  the 
salary  of  the  commissioner  of  farm-land  banks,  which  in  general  cor- 
respond with  the  provisions  governing  the  Comptroller  of  the  Cur- 
rency. It  also  provides  for  the  oath  to  be  taken  and  the  bond  to  be 
given  by  the  commissioner  of  farm-land  banks. 

Section  4  provides  for  the  appointment,  the  duties,  the  oath,  and 
bond  of  a  deputy  commissioner  of  farm-land  banks. 

Section  5  provides  for  the  seal  of  office. 

Section  6  provides  for  the  office  supplies,  etc.,  of  the  new  bureau, 
and  for  the  employment,  classification,  etc.,  of  necessary  clerks. 

Section  7  prohibits  the  commissioner,  the  deputy  commissioner, 
or  any  clerk  from  being  mterested  in  any  farm-land  bank.  The  wis- 
dom of  a  prohibition  of  this  kind  is  apparent,  when  this  bureau  is  to 
supervise  the  operations  of  such  banks. 

Section  8  provides  for  the  making  by  the  commissioner  of  an 
annual  report  to  Congress,  and  specifies  what  such  report  shall  con- 
tain. 

Section  9  provides  for  the  adoption  by  the  Secretary  of  the 
Treasury  of  the  plans,  rules,  and  regulations  to  govern  the  bureau  of 
farm-land  banks  and  requires  their  enforcement  by  the  commissioner. 

Section  10  gives  to  the  commissioner  the  power  to  issue  charters 
to  national  faim-land  banks  and  to  withch-aw  or  forfeit  such  charters 
or  liquidate  such  banks  whenever  necessary  (m  ticcordanco  with  the 
rules  of  the  bureau)  and  to  exercise  supervision  and  control  over,  and 
make  examinations  of,  such  banks. 

Section  11  authorizes  the  commissioner,  by  general  rules  ap- 
proved by  the  Secretary  of  the  Treasury,  to  specify  the  conditions 
under  which  certam  privileges  provided  in  the  biU  may  be  extended 
to  farm-land  banks.  This  section  gives  to  the  commissioner  the 
power  to  lay  down  general  rules  by  comj^lianco  with  which  these 
privileges  may  be  secured.  The  privileges  themselves  are  more 
fully  s])ecified  in  section  34.  The  ol)ject  of  this  method  of  extending 
these  privileges  is  to  bring  about  a  uniformity  in  State  laws  governing 
conve}^ancing,  registration,  and  foreclosure  and  to  secure  recognition 
of  national  huid-bank  bonds  by  State  institutions  as  legal  invest- 
ments for  savings,  trust,  and  insurance  funds.  Provision  is  made  by 
34 


AGEICULTTJEAL   CREDIT.  35 

which  the  commissioner  Ls  given  the  power  to  specify  when  such 
rules  shall  go  into  effect.  Section  11  simply  confers  this  power  upon 
the  commissioner.     Section  34  describes  these  privileges  in  detail. 

Section  12  provides  for  the  publishing  by  the  commissioner,  with 
the  approval  of  the  Secretary  of  the  Treasury,  of  the  amortization 
tables  to  bo  used  by  the  national  farm-land  banks.  Later  on  in  the 
bill  provision  is  made  requiring  the  banks  to  adopt  and  use  the 
amortization  principles  in  all  long-term  mortjjage  loans.  By  this 
means  the  loans  will  l)e  paid  off  in  small  periodic  installments.  For 
the  protection  of  the  farmer,  who  is  naturally  not  sufficiently  con- 
versant with  this  matter  to  correct  any  error  in  amortization  tables 
which  might  be  m  use  by  the  bank,  a  standard  set  of  amortization 
tables  must  be  furnished  by  the  commissioner,  and  this  must  be  used 
by  the  banks.  The  provision  is  in  the  interest  of  both  the  borrower 
and  of  the  banks.  It  assures  to  the  landowner  and  to  the  purchaser 
of  the  national  land-bank  bonds  a  known  and  regular  reduction  of 
the  principal  amount  due  under  the  tables  of  amortization  which 
have  been  prepared  or  approved  by  the  Secretary  of  the  Treasury. 

Section  13  provides  for  the  organization  of  national  farm-land 
banks  by  any  number  of  natural  persons  not  less  than  10.  The 
section  generally  follows  the  provision  for  the  organization  of  national 
banks  under  the  national  banking  act. 

Section  14  provides  in  detail  for  what  shall  be  contained  within  the 
organization  certificate.     Under  this  section  are  provided: 

First.  That  the  name  "national  farm-land  bank"  must  be  used  by 
those  institutions  and  can  not  be  used  by  any  other  institutions. 
This  will  enable  the  purchaser  of  the  national  land-bank  bonds  to 
know  beyond  question  the  character  of  the  security  which  he  is  pur- 
chasing and  to  know  that  the  institution  issuing  these  securities  is 
operated  under  Federal  supervision  and  under  the  general  provisions 
of  this  law.  This  subdivision  also  provides  that,  where  such  national 
farm-land  bank  decides  to  use  the  cooperative  principle,  the  word 
"cooperative"  should  be  a  part  of  its  title. 

There  can  therefore  be  no  question  as  to  the  character  of  the 
mstitution  issuing  the  national  land-bank  bonds.  If  cooperative, 
that  fact  ^vill  be  indicated  in  its  title.  In  the  absence  of  the  word 
"cooperative,"  it  will  be  evident  that  the  bank  is  purely  an  institu- 
tion for  profit.  Subject  to  these  regulations,  the  institution  is 
allowed  to  select  a  descriptive  title  to  prefix  the  words  "national 
farm-land  bank"  or  "national  farm-land  bank,  cooperative."  A 
provision  is  made  for  the  designation  of  each  bank  Iby  an  official 
number,  as  in  the  case  of  national  bankmg  associations.  It  should 
be  noted  that  the  title  of  these  national  farm-land  banks  indicates 
correctly  the  scope  of  then*  activities,  as  will  appear  later  in  the  bill. 
Their  loans  are  limited  to  farmers  and  they  are  not  permitted  to  lend 
on  city  property. 

Under  this  section  the  distinction  is  drawn  between  the  ordinary 
farm-land  bank  and  the  cooper-ative  institution.  In  the  cooperative  in- 
stitutions, the  owning  of  shares  by  an  mdividual  stockholder  is  limited 
to  10  per  cent  of  the  share  capital;  the  voting  power  is  based  on  mem- 
bership and  not  on  the  number  of  shares,  a  vote  beuig  given  to  each 
stockholder  u-respective  of  his  ownership  of  stock;  and  the  distribu- 
tion of  profits  is  made  on  the  cooperative  prmciple  instead  of  on  the 
basis   01   stock   ownership.     This   provides   that  stockholders   may 


36  AGEICULTUEAL    CREDIT. 

first  receive  a  return  on  their  investment  equal  to  the  general  pre- 
vailing rate  of  interest  in  that  community,  but  not  to  exceed  the 
legal  rate  in  that  State.  The  remainder  of  the  net  earnings  is  dis- 
tributed among  the  patrons  of  that  institution  (that  is  to  say,  among 
the  borrowers)  in  proportion  to  their  borrowings.  This  provision  is 
qualified,  to  the  extent  that  shareholders- who  have  been  borrowers 
may  receive  dividends  on  their  borrowings  at  a  rate  twice  as  great 
as  paid  to  nonshare-owning  patrons.  This  provision  is  not  manda- 
tory, but  lies  in  the  discretion  of  the  share-owning  patrons  or  bor- 
rowers. Its  purpose  is  to  encourage  borrowers  to  become  share- 
holders, and  particularly  to  encourage  borrowers  to  invest  the  divi- 
dends, so  paid  to  them  as  such  borrowers,  in  shares  cf  the  company. 
For  that  reason,  as  well  as  to  make  it  possible  to  widen  the  distribu- 
tion of  its  stock,  the  shares  of  cooperative  banks  may  be  of  the  par 
value  of  $25  each,  instead  of  $100  each. 

The  distinction  between  the  cooperative  banks  and  the  regular 
banks  is  outhned  in  this  section,  and  it  is  provided  that  in  other 
respects  the  two  banks  shall  be  governed  by  the  same  general  laws. 
Outside  of  the  limited  stock  ownership  and  the  votmg  by  members 
instead  of  according  to  stock  ownership,  the  principal  feature  of  the 
cooperative  bank  is  the  distribution  of  its  profits.  The  plan  here 
outlined  conforms  to  the  plan  very  generally  adopted  throughout  the 
world  in  cooperative  stores,  dairying  associations  and  other  similar 
enterprises.  The  parties  who  furnish  the  share  capital  receive  first  a 
fair  rate  on  their  investment.  The  balance  of  the  profits  goes  as 
dividends  to  the  patrons — not  to  the  stockholders.  This  means 
that  the  patron  thereby  in  effect  gets  a  reduction  on  his  interest 
rate;  a  part  of  the  interest  paid  by  him  is  returned  at  the  end  of  the 
year  in  the  shape  of  a  dividend.  The  stockholder  after  getting  a 
fair  return  for  his  money  has  no  further  interest  in  the  profits  as  a 
stockholder;  but  the  stockholder  as  a  patron  is  entitled  to  a  share 
of  the  additional  profits  in  proportion  to  his  borrowings.  But  the 
shareholder  may  get  twice  as  much  dividend  on  his  borrowings  as 
the  nonshareholder  gets.  Thereby  the  nonshareholder  is  encouraged 
to  become  a  shareholder. 

Second.  That  the  State  in  which  the  operations  of  the  bank  shall 
be  carried  on  shall  be  designated  and  the  place  in  the  State  where  the 
principal  ofiice  is  to  be  located  shall  be  shown.     As  explained  in  the 

f)receciing  general  discussion  of  the  bill,  the  loans  of  a  national  farm- 
and  bank  arc  limited  to  one  State;  hence  the  necessity  for  the 
designation  by  the  bank,  in  its  organization  certificate,  of  the  State 
in  which  it  will  be  operated.  Provision  is  also  made  for  changing 
the  principal  office  to  some  other  point  within  the  State  when  desired. 
Tnird.  That  the  amount  of  capital  stock  and  its  division  into  shares 
shall  be  specified,  with  a  provision  that  the  minimum  capital  shall  be 
$10,000  and  with  a  provision  for  its  iucrease. 

The  minimum  of  $10,000  was  fixed  by  the  commission  after  very 
careful  deliberation.  It  was  felt  that  the  minimum  of  $25,000  now 
existing  in  the  case  of  national  banking  associations  was  too  high, 
for  the  reason  that  many  farming  communities  which  would  desire  to 
take  out  charters  under  this  act  would  be  unable  to  provide  this 
amount  of  capital.  On  the  other  hand,  the  commission  recognized 
the  necessity  of  careful  and  adequate  supei^vision  by  the  Government 


AGRICULTURAL    CREDIT.  37 

and  did  not  wish  to  create  institutions  so  small  that  the  burden  and 
cost  of  examination  and  supervision  would  be  proportionately  too 
great.  The  amount  of  $10,000  was  finalh^  arrived  at  as  the  wise 
minimum  under  the  circumstances. 

Fourth.  That  the  names,  residences,  and  number  of  shares  of  stock- 
holders shall  be  shown,  rs  m  the  case  of  national  banking  associations, 
so  that  the  double  liability  hereinafter  j)rovided  may  be  enforced  when 
necessary. 

Fifth.  That  the  certificate  is  made  for  the  purpose  of  organizing  a 
national  farm-land  bank. 

Section  15  provides  for  the  method  of  acknowledging  and  preserv- 
ing the  organization  certificate. 

Section  16  defines  the  general  powers  of  national  farm-land  banks. 
This  includes  the  usual  and  ordinary  powers  of  similar  corporations. 
The  period  of  duration  of  the  bank  is  fixed  at  50  years,  unless  sooner 
dissolved.  The  charters  are  made  subject  to  change,  amendment,  or 
repeal  under  general  laws  enacted  by  Congress,  provided  that  the 
rights  of  creditoi*s  arc  not  thereby  affected.  Provision  is  made  for 
their  control  by  a  board  of  not  less  than  five  nor  more  than  nine 
directors.  A  broad  latitude  in  the  by-laws  of  each  bank  is  per- 
mitted. 

I  nder  "seventh"  of  this  section  the  necessary  incidental  powers 
are  given  to  such  farm-land  banks,  with  the  provision  that  certain 
specific  powers  shall  appertain  to  each  such  bank.     In  these  specific 

Eowers  are  outlined  the  distinguishing  characteristics  of  farm-land 
anks  as  distinguished  from  commercial  banks.     Among  these  pow- 
ers are: 

(a)  The  power  to  accept  deposits  only  to  the  extent  of  50  per  cent 
of  their  capital  and  surplus.  The  farm-land  banks  are  not  intended 
to  do  a  commercial  banking  business.  The  great  volume  of  commer- 
cial banking  business  is  based  on  the  deposits  in  the  commercial 
banks.  Deposits  are  not  a  proper  basis  for  mortgage  loans,  because 
deposits,  1)eing  payable  within  a  short  time  or  on  demand,  are  not 
suitable  for  investment  in  bonds  maturing  from  5  to  35  years  from 
their  date. 

On  the  other  hand,  in  making  farm  loans  on  mortgages,  these  banks 
will  undoubtedly  frequently  have  to  hold  as  a  deposit  the  money  so 
loaned.  ]\Ioreover,  in  carrying  on  a  business  incidental  to  farm-land 
banking,  they  must  of  necessity  at  times  have  some  deposits.  Con- 
sequently they  are  permitted  to  receive  deposits  to  a  limited  extent, 
namely,  to  the  extent  of  one-half  of  their  capital  and  surphis.  But 
these  limitations  effectively  rem.ove  them  from  competition  with  com- 
mercial banks  and  arc  in  accord  with  the  general  rules  governing  land 
banks  in  European  countries. 

In  considering  this  question  of  limitations  on  deposits  in  farm-land 
baidcs  the  commission  considered  very  carefully  the  question  as  to 
whether  it  should  be  a  Ihnitation  on  the  amount  of  deposits  or  simply 
a  limitation  on  the  character  of  deposits.  It  was  urged  that  time 
deposits  running  for  one  year  or  longer  could  be  safely  received  by 
the  farm-land  banks  and  used  for  investment  in  national  land-bank 
bonds  of  the  institution.  On  the  otlu^r  hand,  it  was  urged  that  a  lim- 
itation of  the  amount  of  deposits  might  work  a  great  hardshij)  in  the 
actual  oj)eration  of  the  banks;  but  the  connnission,  after  a  full  con- 
sideration of  this  question,  decided  that  the  limitation  should  be  upon 

45iG42 


38  AGRICULTURAL   CREDIT. 

the  amount  and  that  the  example  of  loan  banks  in  European  countries 
could  safely  be  followed  in  this  respect.  The  only  exception  made 
was  a  provision  later  on  in  the  bill  that  this  limitation  should  not  apply 
to  the  deposit  of  postal  savings  funds,  wliich,  taken  as  a  whole,  are 
different  from  ordinary  deposits.  They  are  more  constant  and  less 
susceptible  to  fluctuation,  because  the  credit  of  the  Government  is 
specilically  pledged  for  theu'  repayment;  but  the  limitation  on  the 
amount  of  deposits,  except  as  stated,  absolutely  removes  farm-land 
banks  from  all  competition  with  commercial  banks,  and  also  removes 
the  danger  that  might  threaten  such  farm-land  banks  if  a  large  volume 
of  deposits  has  been  invested  in  long-term  bonds  and  were  suddenly 
called  for  payment. 

{h)  The  second  specific  power  of  the  farm-land  banks  is  the  power 
to  make  loans  upon  farm  lands  anywhere  withm  the  State.  This 
power  is  accompanied  by  certain  conditions  which  must  be  compUed 
with.  These  conditions  constitute  the  basic  security  of  the  national 
land-bank  bonds.  Each  provision  has  received  the  most  careful  con- 
sideration and  has  been  studied  in  the  light  of  European  experience 
as  well  as  of  American  conditions.  Each  of  these  provisions  or  con- 
ditions is  believed  to  represent  a  wise  decision  in  the  interest  of  the 
borrower,  of  the  bank,  and  of  the  investor. 

These  provisions  are: 

(1)  That  such  loans  be  made  for  not  more  than  35  years.  In  some 
of  the  European  countries  the  loans  run  for  a  longer  term,  sometimes 
as  long  as  75  years.  It  is  fundamental  that  the  longer  the  loan  at  a 
given  rate  of  interest,  the  smaller  the  amortization  payment.  On  the 
other  hand,  it  was  ascertained  that  in  some  of  the  countries  where 
these  very  long  time  loans  prevail  the  unwisdom  of  the  course  was 
recognized  and  efl"orts  were  being  made  to  provide  for  the  repayment 
of  the  loans  within  a  generation,  by  attaching  to  the  loans  me  insur- 
ance policies  payable  on  the  death  of  the  borrower.  The  wisdom  of 
extending  a  large  volume  of  farm  loans  as  a  burden  upon  succeeding 
generations  is  at  least  questionable.  The  commissioners  believed  that 
the  American  people  would  not  approve  of  the  creation  of  a  large  body 
of  farm  loans  running  over  two  or  three  generations  before  maturity. 
They,  moreover,  were  convinced  that  the  reduction  in  the  amount  of 
amortization  payments,  in  the  case  of  a  very  long  time  loan  was  not 
sulFiciently  great  to  justify  the  burdening  of  future  generations  with 
such  a  debt,  and  that  the  American  people  could  easily  meet  their 
farm  mortgages  within  a  period  not  greater  than  35  years  on  the 
amortization  principle,  and  that  the  earnings  of  the  farmers  would 
justify  this  shorter  term.  An  examination  of  amortization  tables 
seemed  conclusive  that  the  term  of  35  years  gives  am])le  time  for  the 
repayment  of  these  loans  at  a  rate  of  amortization  which  the  Ameri- 
can farmer  can  readily  meet. 

(2)  That  all  farm- mortgage  loans  shall  be  on  jirst  mortgages  and 
that  second  and  tliird  mortgage  loans  are  prohibited.  This  serves 
to  insure  to  the  investor  that  the  national  land-bank  bond  purchased 
by  him  is  secured  by  an  absolute  first  mortgage  on  farm  lands.  With 
this  assurance  the  national  land-bank  bonds  will  sell  on  better  terms, 
with  resultant  benefit  to  the  borrowing  farmer. 

(3)  Almost  any  institution  can  be  used  for  purposes  not  intended 
by  those  who  organize  it.  Every  effoi-t,  however,  should  be  made  to 
restrict  abuses  wherever  possible.     In   order  that  the  institutions 


AGRICULTURAL    CREDIT.  39 

provided  in  the  bill  may  not  be  used  successfully  by  those  whose  prin- 
cipal purpose  is  to  speculate,  certain  limitations  have  been  made  as 
to  the  use  of  the  loans.  No  farmer  interested  in  the  upbuilding  6f 
agriculture  and  the  extension  of  production  will  desire  to  negotiate 
a  loan  except  to  complete  the  purchase  price  of  the  agricultural  lands 
mortgaged,  or  to  improve  and  equip  his  farm  in  order  to  extend 
agricultural  production,  or  in  order  to  refund  outstanding  mortgages. 

(4)  That  the  loans  shall  not  exceed  50  per  cent  of  the  value  of 
improved  farm  lands  or  40  per  cent  of  other  lands,  the  value  to  be 
determined  by  an  appraisal.  This  proportion  was  arrived  at  after  a 
careful  study  of  the  proportions  used  in  European  countries  and 
of  American  conditions.  Moreover,  the  proportions  used  follow 
those  in  reference  to  loans  on  farm  lands  provided  in  the  Federal 
reserve  act. 

(5)  That  every  such  farm-mortgage  loan  shall  contain  a  man- 
datory pro\asion  for  the  repayment  of  such  loan  by  amortization. 
The  investor  in  the  national  land-bank  bond  will  know  that 
every  mortgage  held  by  the  bank  of  issue  contains  a  mandatory 
provision  for  amortization  payments,  so  that  when  the  national  land- 
bank  bond  held  by  him  falls  due  the  bank  will  have  received  in  cash 
from  the  farmer  the  amount  of  the  mortgage  held  by  the  bank  to 
secure  such  national  land-bank  bond.  The  loan  to  the  farmer  must 
be  for  not  less  than  five  years,  because  the  amortization  principle  can 
not  be  very  well  apphed  to  a  loan  for  a  shorter  period. 

It  should  be  noted  that  the  farm-land  banks  are  authorized  else- 
where in  the  bill  to  lend  money  on  farm  mortgages  running  for  less 
than  five  years;  but  they  can  not  issue  national  land-bank  bonds 
against  mortgages  running  less  than  five  years,  because  such  mort- 
gages run  for  such  a  short  term  that  they  do  not  lend  themselves  to 
the  amortization  plan.  The  whole  theory  of  the  bill  is  that  no 
national  land-bank  bond  can  be  issued  by  any  farm-land  bank  unless 
the  mortgages  securing  such  national  land-bank  bonds  contain  an 
amortization  provision,  which  of  necessity  pays  off  the  mortgage  by 
its  maturity,  and  thus  provides  the  bank  with  the  money  to  repurchase 
the  national  land-bank  bond  issued  against  it. 

(6)  That  the  farmer  or  borrower  may  pay  off  his  loan  at  any 
interest  period  after  five  years.  The  loan  can  not  be  paid  off 
within  less  than  five  years,  except  at  the  option  of  the  banK.  The 
reason  is  that  the  banks'  profits  or  administration  charges  are 
limited  to  so  small  an  annual  amount  that  it  must  continue  for  at 
least  five  years  to  enable  the  bank  to  handle  the  loan.  During  that 
period,  if  the  farmer  wishes  to  pay  the  loan,  the  bank  may  or  may  not 
consent.  After  five  years  the  farmer  has  the  absolute  right  to  pay 
off  his  loan  at  any  interest  period.  Consequently,  if  interest  rates 
should  fall,  the  farmer  could  pay  off  his  mortgage  carrying  a  high 
interest  rate  and  borrow  again  on  more  advantageous  terms.  This 
is  a  most  important  privilege  to  'the  farmer  and  should  make  him 
feel  that  he  runs  no  risk  in  creating  a  mortgage  on  his  farm  for  a 
long  term  at  existing  interest  rates.  If  the  interest  ratej  thereafter 
rise  the  bank  can  not  make  him  pay  an  increased  rate,  but  the  agreed 
rate  holds  until  the  mortgage  falls  due,  and  in  the  meantime  tlie 
amortization  payments  pay  off  the  mortgage.  If,  on  the  other  hand, 
the  interest  rates  should  fall,  then  after  five  years  he  can  j)ay  off  the 
existing  mortgage  and  create  a  new  mortgage  at  the  lower  rates. 


40  AGRICULTURAL   CREDIT. 

(c)  The  third  specific  power  of  the  farm-land  bank  is  the  power  to 
issue,  sell,  and  trade  in  its  own  collateral  trust  bonds,  wiiicli  are 
desif!;nated  as  national  land-bank  bonds.  These  national  land-bank 
bonds  are  in  reality  collateral  trust  bonds,  in  that  they  are  the  bonds 
of  the  farm-land  bank,  secured  by  the  deposit,  in  trust,  as  collateral 
to  the  same,  of  first  mortgage  or  first  deeds  of  tiaist  on  farm  lands. 

The  conditions  under  which  the  national  farm-land  bank  can  issue 
national  land-bank  bonds  are  specified  under  six  heads  and  are  care- 
fully worked  out  so  as  to  protect  the  farmer,  the  bank,  and  the 
investor. 

They  are  as  follows : 

(1)  That  the  rate  of  mterest  paid  by  the  farmer  to  the  bank  shall 
not  exceed  the  rate  of  interest  paid  by  the  bank  to  the  hivestor  by 
more  than  1  per  cent,  and  this  1  per  cent  must  include  all  charges  of 
administration  or  expenses  of  the  bank. 

This  provision  is  one  of  the  principal  protections  to  the  farmer  and 
is  the  greatest  guaranty  to  him  that  he  will  secure  the  most  advan- 
tageous interest  rates.  The  farmer  who  wishes  to  borrow  a  thousand 
dollars  from  the  bank  on  the  security  of  his  land  fmds  that  the  bank 
is  able  to  sell  its  national  land-bank  bonds,  bearmg  4  per  cent,  at  par. 
The  bank  is  willing  to  lend  him  a  thousand  dollars  on  the  security  of 
his  farm.  The  bank  is  prohibited  from  charging  him  on  such  loan 
more  thnn  5  per  cent,  because  the  rate  of  interest  paid  by  the  farmer 
must  not  exceed  the  rate  paid  by  the  bank  to  the  mvestor  by  more 
than  1  per  cent.  Naturally  the  bank  will  sell  its  national  land-bank 
bonds  at  the  lowest  interest  rate  possible.  The  farmer  gets  the 
benefit  of  this,  because  whatever  mterest  rate  is  paid  by  the  bank, 
the  farmer  can  only  be  charged  a  rate  1  per  cent  higher,  and  this  1 
per  cent  must  cover  all  admmistration  charges  of  the  bank. 

(2)  That  all  national  land-bank  bonds  must  be  payable  on  a  date 
specified.  The  American  method  of  having  bonds  payable  at  a 
spe^ijfied  time  is  so  thoroughly  grounded  in  the  American  people  that 
it  was  thought  mse  to  require  that  all  bonds  be  payable  at  a  specified 
time.  It  is  true  that  the  time  of  liciuidation  of  the  bond  would  be 
determined  by  the  amortization  payment  on  the  mortgage  securuig 
the  bond.  In  Europe  it  frequently  happens  that  land-bank  bonds 
have  no  defuiite  due  date;  but  the  American  public  is  not  conver- 
sant with  the  practice  of  issumg  bonds  with  no  clefinite  maturity,  and 
consequently  this  provision  seems  wise.  By  making  the  bonds  sub- 
ject to  call  at  par,  provision  is  made  enabling  the  bank  to  retire  its 
land-bank  bonds  as  the  mortgages  are  paid  ofl^  by  amortization  or 
otherwise. 

(3)  That  national  land-bank  bonds  shall  always  be  protected  by 
the  deposit  of  first  mortgage  or  first  deed  of  trust  farm  loans  of  an 
equal  amount  in  face  value,  maturing  not  less  than  five  years  from  date. 
In  times  when  interest  rates  are  low  and  mortgages  thcreloforo 
taken  bear  a  higher  rate,  the  mortgage  might  be  worth  more  than 
par.  Conversely,  when  interest  is  high  a  mortgage  theretofore  taken 
(if  offered  for  sale)  might  sell  at  less  than  par.  In  the  absence  of  a 
provision  such  as  this  there  mio;ht  be  a  fiuctuation  in  the  security 
deposited  for  the  land-bank  bonds;  but  under  the  amortization  plan, 
the  amortization  payments  rethe  the  morf^age  automatically  with- 
out reference  to  the  interest  rate.  By  requirmg  the  mortgage  deposits 
to  be  of  the  same  par  value  as  the  national  land-bank  bonds  issued 


AGRICULTTJEAL    CREDIT.  41 

against  them,   the  payment    of  both   principal   and  interest  of  the 
land-bank  bonds  is  assured. 

(4)  That  the  amortization  payments  as  made  must  be  credited 
on  the  mortgages,  and  the  land-bank  bonds  issued  against  such 
mortgages  must  be  rethed  to  that  extent.  Here  is  involved  the 
difference  between  an  amortization  payment  and  a  smking  fund. 
The  amortization  when  made  is  credited  on  the  instrument  itself, 
thereby  reducing  the  face  of  the  debt.  The  smking  fund  is  kept 
separate  and  uivested.  If  the  investment  of  the  smking  fund  is 
wise,  it  may  pay  off  the  debt  even  earlier  than  the  amortization 
payment  would  do;  but  if  unwise,  the  result  may  be  the  opposite. 
The  amortization  payment,  being  credited  on  the  mortgage  itself, 
there  can  be  no  uncertainty  or  question  as  to  the  amount  by  which 
the  debt  is  reduced.  When  they  are  credited  as  each  payment  falls 
due,  the  debt  must  be  wiped  out  at  its  maturity. 

This  section  also  provides  that  the  land-bank  bonds  must  be 
retired  as  the  amortization  payments  are  made,  and  thereby  the 
amount  of  national  land-bank  bonds  outstanding  is  always  kept  at  a 
parity  with  the  mortgages  held  as  security  for  them. 

(5)  That  the  mortgages  held  as  security  for  national  land-bank 
bonds  shall  be  in  the  jomt  possession  of  the  bank  and  of  the  special 
official  known  as  the  Federal  fiduciary  agent  and  that  the  register 
of  such  mortgages  shall  be  kept  by  the  bank,  but  the  entries  therein 
can  only  be  made  with  the  approval  of  the  Federal  fiduciary  agent. 
This  provision  is  essential  and  throv/s  the  greatest  safeguard  around 
the  operations  of  the  bank.  A  specific  Government  agent  is  given 
joint  possession  with  the  bank  of  the  mortgages  securing  the  national 
land-bank  bonds  and  is  given  control  over  the  registry  of  such  mort- 
gages. The  necessity  and  wisdom  of  this  provision  are  obvious, 
as  this  insures  the  most  effective  Government  supervision  over  the 
operations  of  the  farm-land  banks  and  particularly  of  the  securities 
on  which  the  national  land-bank  bonds  are  based. 

(6)  That  no  national  land-bank  bond  shall  be  issued  against  any 
mortgage  running  for  less  than  five  years.  The  reasons  for  this 
have  been  fully  explained  above. 

{d)  The  fourth  specific  power  of  the  national  farm-land  bank  is 
the  power  to  use  its  capital,  surplus,  and  deposits  as  a  revolving 
fund  for  the  temporary  purchase  and  holding  of  first-mortgrge 
loans.  By  this  means  the  bank  is  enabled  to  make  the  loans  to  the 
farmer  and  secure  the  mortgage  and  thereafter  to  issue  its  national 
land-bank  bonds  against  the  same.  This  provision  gives  the  bank 
the  working  capital  with  which  to  conduct  its  operations.  Moreover, 
the  bank  is  authorized  to  use  this  same  fund  to  buy  in  temporarily 
its  national  land-bank  bonds,  so  as  to  maintain  the  ])rico  of  the  same. 

It  is  obvious  that  these  national  land-bank  bonds  wOl  as  a  rule 
be  held  as  permanent  investments.  On  the  other  hand,  the  investor 
may  from  time  to  time  wish  to  dispose  of  one  or  more  of  such  bonds. 
It  will  be  essential  that  he  be  enabled  to  sell  the  same  without  diffi- 
culty if  the  price  is  to  be  maintained.  Conseciuently  the  bank  is 
allowed  to  purchase  temporarily  bonds  offered  for  sale  and  subse- 
quently to  sell  them  agam,  thereby  maintaining  the  market.  This 
is  a  most  important  provision,  for  unless  the  market  is  maintained 
the  bonds  will  undoubtedly  depreciate  in  times  of  depression,  and 
every  market  depreciation  would  result  in  injuring  the  security  and 
in  making  investors  timid  m  regard  to  the  same. 


42  AGEICULTTJRA.L   CREDIT. 

The  capital,  surplus,  and  deposits  can  also  be  loaned  on  short- 
term  first  mortgages  not  exceeding  five  years.  The  object  of  this 
is  to  enable  the  bank  to  take  care  of  short-term  mortgage  credit. 
It  is  assumed  that  the  gi*eat  volume  of  such  short-term  mortgages, 
runnmg  for  five  years  or  less,  would  be  disposed  of  by  the  bank  to 
local  investors,  but  the  very  fact  that  the  bank  is  authorized  to 
make  such  short-term  loans  will  tend  to  encourage  their  being  taken  up 
by  local  investors;  and  no  system  of  farm-land  banks  would  be  com- 
plete which  did  not  make  provision  for  taking  care  of  these  short- 
term  loans  as  well  as  of  the  long-term  mortgage  loans  containing 
the  amortization  feature.  The  bank  is  prohibited  from  permanently 
investing  more  than  one-half  of  its  capital  and  surplus  m  such  short- 
term  mortgage  loans  or  in  its  national  land-bank  bonds,  so  as  to 
prevent  the  tying  up  of  all  its  resources  in  this  way.  It  can,  how- 
ever, invest  the  balance  of  its  capital  and  surplus  in  interest-bearing 
securities,  such  as  Government  bonds,  its  own  State  bonds,  and  in 
any  other  security  which  may  be  approved  by  the  commissioner  of 
farm-land  banks. 

(e)  The  fifth  specific  power  of  the  farm-land  bank  embraces  the 
power  to  do  an  ordinary  banking  business  to  accommodate  the 
ordinary  banldng  requirements  of  the  community  to  a  limited 
extent;  that  is,  as  far  as  may  be  required  by  the  limited  volume  of 
deposits  which  it  is  authorized  to  keep,  namely,  deposits  to  the  extent 
of  50  per  cent  of  its  capital  and  surplus. 

Each  bank  is  also  authori::ed  to  deal  in  national  land-bank  bonds 
of  other  farm-land  banks  with  its  deposits.  This  will  enable  the  bank 
with  a  large  capital,  located  in  a  section  where  money  is  plentiful,  to 
purchase  and  trade  in  the  national  land-bank  bonds  issued  by  banks 
in  less  favored  sections,  and  thereby  to  maintain  the  market  for  its 
securities,  and  to  use  the  funds  available  in  one  section  of  the  country 
to  meet  the  needs  in  other  sections. 

The  right  to  use  its  deposits  in  purchasing  commercial  and  other 
short-term  paper,  and  to  rediscount  the  same  with  other  banks,  is  a 
necessary  incident  to  the  power  to  take  deposits  to  the  limited  extent 
provided. 

The  commission  believes  that  to  a  large  extent  future  develop- 
ment of  rural  banking,  will  proceed  along  lines  of  cooperation.  We 
have  therefore  extended  the  powers  of  the  proposed  national  farm- 
land banks,  cooperative,  so  as  to  permit  these  institutions  to  do  a 
full  banking  business,  under  the  laws  of  the  United  States,  exclu- 
sively for  their  own  membership.  This  provision,  were  it  enacted 
into  law,  will  not  confer  the  advantages  of  an  unlimited  federal 
charter  but  it  will  give  great  encouragement  and  opportunity  to  the 
pevelopment  of  cooperative  business  organization  among  farmers. 
It  is  presented  by  the  commission  as  being  the  smallest  advance 
which  should  be  granted  by  the  Federal  Government  at  this  moment 
to  this  new  movement  in  the  rural  life  of  our  Nation. 

SPECIFIC    LIMITATIONS    UPON    FARM-LAND    BANKS. 

There  are  contained  in  this  bill  four  specific  limitations  imposed 
upon  every  national  farm-land  bank.  Tnese  are  more  particularly 
as  follows : 

(a)  The  amount  of  national  land-bank  bonds  that  may  be  issued 
and  outstanding  at  any  one  time  must  not  exceed  fifteen  times  the 
capital  and  accumulated  surplus  of  the  bank. 


AGBICULTURAL    CBEDIT.  43 

The  whole  theory  of  the  farm-land  bank  is  based  upon  a  use  of  its. 
credit  rather  than  of  its  cash  resources.  The  commercial  bank  does 
its  business  on  the  basis  of  its  cash  resources  or  of  its  deposits.  It 
does  not  use  its  credit  except  to  a  very  limited  extent.  As  an  illus- 
tration, no  national  banking  association  is  allowed  to  execute  a  pure 
contract  of  guaranty.  But  the  farm-land  bank  primarily  uses  its 
credit  rather  than  its  cash  resources,  and  consequently  some  limi- 
tation must  be  put  upon  this  use  of  its  credit. 

In  Europe  some  of  the  land  banks  have  been  allowed  to  issue 
collateral  trust  bonds  to  the  extent  of  twenty  times  theu'  capital  and 
surplus;  but  the  general  trend  is  toward  a  reduction,  and  the  best 
thought  on  the  subject  seems  to  indicate  that  fifteen  times  the  capital 
and  surplus  will  represent  a  fau'  amount  of  collateral  trust  bonds  to 
be  issued  by  the  bank.  This  means  that  against  the  national  land- 
bank  bonds  issued  by  the  bank  there  are  deposited  in  the  joint  custody 
of  the  bank  and  of  the  Federal  fiduciary  agent  first  mortgages  on  farm 
lands  at  not  to  exceed  50  per  cent  of  their  appraised  value  to  an 
amount  equal  to  the  face  value  of  the  national  land-bank  bonds  issued, 
and  that  the  farm-land  bank,  in  addition,  holds  m  the  shape  of  capital 
or  surplus  $1  in  cash  or  in  quick  assets  for  every  $15  of  national  land- 
bank  bonds  outstanding. 

(6)  The  charges  of  administration  imposed  upon  the  borrower  shall 
not  exceed  an  annual  charge  of  1  per  cent  upon  the  amount  unpaid 
on  the  loan.  This  limitation  is  in  the  interest  of  the  farmer  as  a  bor- 
rower. It  fixes  the  charge  which  can  be  made  by  the  bank  for 
handling  the  loan  at  not  exceeding  1  per  cent  of  the  loan.  This  1  per 
cent  is  not  1  per  cent  of  the  original  loan,  but  1  per  cent  of  the  amount 
unpaid  on  the  loan.  As  heretofore  explained,  this  1  per  cent  repre- 
sents the  excess  of  interest  charged  the  farmer  over  the  rate  of  inter- 
est put  by  the  bank  on  its  national  land-bank  bonds.  It  must  cover 
the  entire  profits  of  the  bank  in  the  transaction,  though,  of  course, 
the  amortization  pajTnent  for  the  retirement  of  the  principal  of  the 
debt  is  in  addition  to  this  amount. 

(c)  The  periodic  payments  by  the  borrower  must  be  sufficient  in  all 
cases  to  pay  the  interest  charge  upon  the  loan,  to  cover  the  admmis- 
tration  charge  of  the  bank,  and  to  include  an  amortization  payment 
sufficient  to  retire  r.nd  pay  off  the  amount  of  the  prmcipal  borrowed 
at  its  maturity.  If  a  farm-land  bank  can  sell  its  4  per  cent  national 
land-bank  bonds  at  par,  then  the  farmer  wishing  to  borrow  from  the 
bank  $1,000  can  be  charged  by  the  bank  the  rate  paid  by  it,  namely, 
4  per  cent  plus  1  per  cent  to  cover  charges  of  administration  and 
the  profits  of  the  bank  plus  an  amount  which  will  be  sufficient  to 
retire  the  loan  at  maturity.  If  the  loan  ran  for  30  years,  for  illustra- 
tion, the  payment  of  1  per  cent  per  year  or  less  would  be  sufficient  to 
pay  off  the  principal  within  that  time,  and  in  the  case  suggested  the 
farmer  by  paying  $30  every  6  months  would  be  able  to  pay  the 
interest  on  the  loan  and  wipe  out  the  loan  by  the  end  of  the  30  years. 
Every  loan  must  provide  for  these  three  specific  items — namely,  inter- 
est, administration  charges,  and  amortization  payments. 

id)  The  wisdom  of  the  ])rovision  preventing  tlu)  loan  by  a  national 
farm-land  bank  upon  its  own  stock  or  the  stock  of  any  other  farm- 
land bank  is  evident.  Such  loans  have  been  ])i()ven  unwise  in  com- 
mercial banks.  The  necessity  for  prohibiting  them  in  faini-land 
banking  is  even  greater.  Likewise,  the  limitation  on  the  amount  that 
can  be  loaned  to  any  one  individual  follows  the  general  provision  con- 


44  AGRICULTURAL    CREDIT. 

tained  in  the  national  banking  act,  except  that  tlie  limitation  is  placed 
at  20  per  cent  of  the  capital  and  sm-plus  with  farm-land  banks  rather 
than  10  per  cent,  as  with  the  national  bankiiio;  associations.  The 
reason  for  this  is  sufhciently  obvious  from  the  different  kinds  of  busi- 
ness carried  on  by  the  two  institutions  and  from  the  necessity  of  per- 
mitting a  bank  with  $10,000  of  capital  to  make  a  loan  on  real  estate 
of  at  least  $2,000. 

Eighth.  This  section  is  practically  identical  with  that  contained  in 
the  national  banking  act. 

HOLDINGS    ON    REAL    ESTATE. 

Section  17 :  This  section  is  practically  identical  with  the  provisions 
contained  in  the  national  banking  act,  and  it  is  particularly  desu'able 
that  some  such  provision  preventing  large  real-estate  ownei-ship  by  a 
bank  whose  principal  busmess  is  lending  on  real  estate  should  be 
enforced. 

EXEMPTION    FROM    TAXATION. 

Section  18:  In  so  far  as  this  section  refers  to  the  exemption  of  cap- 
ital stock  and  income,  it  is  similar  to  the  provision  contained  in  the 
Federal  reserve  act.  The  necessity  for  exempting  the  mortgages  and 
deeds  of  trust  held  by  the  bank  as  security  for  its  national  land-bank 
bonds  and  for  exempting  from  taxation  these  national  land-bank  bonds 
themselves  has  been  fuUy  dealt  with  in  the  general  statement  above. 
Taxes  upon  mortgages,  deeds  of  trust,  and  other  evidences  of  indebt- 
edness secured  on  real  estate  mean  simply  the  payment  of  an  increased 
rate  of  interest  by  the  borrower,  who  already  is  taxed  upon  his  land. 
It  can  not  be  expected  that  loans  for  farmers  can  be  obtained  on 
advantageous  terms  unless  and  imtil  these  evidences  of  debt  are 
exempted  from  taxation,  for  the  amount  of  the  tax  will  unquestion- 
ably be  evidenced  by  an  mcreased  interest  rate,  and  the  farmer  who 
has  paid  his  taxes  on  his  farm  must  ultimately  bear  this  additional 
burden  unless  the  collateral  is  exempt. 

FEDERAL    FIDUCIARY    AGENT. 

Section  19:  As  heretofore  stated,  the  Federal  fiduciary  agent  pro- 
vided for  in  this  act  constitutes  one  of  the  most  important  methods 
of  Government  supervision  and  control  of  farm-land  banks.  This 
agent  is  the  direct  representative  of  the  bureau  of  farm-land  banks, 
liis  duties  are,  first,  to  certify  to  each  national  land-bank  bond 
issued.  In  this  respect  he  takes  the  place  of  the  trustee  under  the 
railroad  mortgage,  who  certifies  to  the  bonds  issued  by  the  railroad, 
and  his  signature  forms  a  guaranty  to  the  investors  that  the  bonds 
are  what  they  purport  to  be.  Second,  he  has  joint  possession  and 
control  with  the  bank  of  the  mortgages  and  deeds  of  trust  deposited 
to  secure  the  national  land-bank  bond.  By  this  means  the  Govern- 
ment assures  to  the  investor  that  the  mortgagees  held  as  security  for 
the  land-bank  bond  bought  by  him  can  not  be  destroyed  or  made 
away  with,  because  they  are  in  the  possession  and  control  of  a  Gov- 
ernment representative.  Holding  such  joint  possession  and  control, 
no  change  in  the  security  for  the  national  land-bank  bond  can  be 
made  without  his  consent  in  wiiting.  Third,  he  has  supervisory  con- 
trol of  the  mortgage  ledger,  in  wliicli  the  statements  of  the  mortgages 


AGRICULTTJEAL   CREDIT.  45 

and  deeds  of  trust  are  contained.  This  is  necessarily  an  incidental 
power  to  his  joint  possession  and  control  of  the  mortgages  themselves, 
and  is  in  the  interest  both  of  the  borrower  and  the  investor,  as  well 
as  of  the  stockholder  of  the  bank,  whose  stock  would  be  liable  in 
case  any  loss  were  sustained  by  the  destruction  of  the  mortgages 
held  for  the  national  land-bank  bonds. 

It  is  provided  that  the  Federal  fiduciary  agent  shall  execute  a  bond 
and  that  his  salary  and  expenses  shall  he  paid  by  the  bank  under 
proper  regulations. 

CAPITAL   STOCK. 

Section  20:  The  shares  are  placed  at  $100  each  except  in  the  case 
of  cooperative  institutions,  in  which  case  they  may  be  $25  each. 
Otherwise  this  section  corresponds  to  the  national  banking  act. 

Sections  21,  22,  23,  24,  and  25  are  exactly  similar  to  corresponding 
sections  in  the  national  banking  act  and  need  no  special  explanation. 

Section  26  follows  the  national  banking  act,  except  that  the  stock 
ownership  of  the  directorate  is  placed  at  5  shares  instead  of  10  shares. 

Sections  27,  28,  29,  and  30  are  similar  to  corresponding  sections  in 
the  national  banking  act. 

Sections  31  and  32  are  exactly  similar  to  corresponding  sections  in 
the  national  banldng  act,  and  provide  for  doublcliability  of  stock- 
holders, thereby  giving  to  the  national  land-bank  bonds  the  secm-ity, 
not  only  of  the  mortgages  or  deeds  of  trust  specifically  deposited  to 
secure  them,  but  also  the  security  of  the  capital  stock  of  the  bank, 
and  in  addition  the  double  liability  of  the  stockholders. 

Section  33  substantially  follows  the  provisions  of  the  corresponding 
section  of  the  national  banking  act. 

PRIVILEGES    GRANTED    TO    NATIONAL    FARM-LAND    BANKS. 

Section  34:  To  the  consideration  of  this  section  the  commission 
has  devoted  a  very  great  deal  of  time  and  thought. 

The  commission  was  very  strongly  impressed  at  the  beginning  of 
its  deliberations  with  the  view  that  in  many  particulars  the  problem 
of  farm-land  banking  was  a  State  problem,  and  it  still  beUeves  that 
State  legislation  can  be  advantageously  had  along  the  line  indicated 
in  the  bill  herewith  submitted.  The  difficulty,  however,  was,  as 
stated  above,  the  varying  conditions  and  laws  existing  in  the  48 
States  of  the  Union,  and  the  almost  impossibility  of  securing  uniform 
legislation  in  the  various  States  and  of  securing  legislation  of  any 
character  in  many  of  the  States.  In  consequence,  the  commission 
was  impressed  with  the  necessity  of  authorizing  the  incorporation  of 
farm-land  banks  under  national  law,  if  any  improvement  was  to  be 
secured  for  the  farmer  within  a  reasonable  time. 

On  the  other  hand,  the  commission  has  recognized  that  the  States 
come  in  direct  touch  with  the  land  and  control  taxation,  methods  of 
registration  and  conveyancing,  exemptions,  methods  of  foreclosure, 
etc.,  in  regard  to  the  land.  In  consequence,  any  act  looldng  toward 
the  incorporation  of  farm-land  banks  under  national  charter  must  be 
confronted  with  the  difficulty  of  afl'ecting  in  any  way  the  State  laws 
governing  these  matters.  Consequently,  it  has  seemed  to  the  com- 
rnission  that  it  was  very  important  that  parties  proposing  to  organ- 
ize a  national  farm-land  bank  should  understan(l  and  be  assured  in 
the  beginning  as  to  just  what  privileges  would  be  accorded  by  the 


46  AGRICULTURAL   CREDIT. 

Federal  Government  to  such  national  incorporations.  Moreover, 
the  commission  has  recognized  that  the  privileges  which  the  National 
Government  might  and  should  offer  to  such  nationally  incorporated 
farm-land  banks  could  advantageously  be  used  as  a  means  of  calUng 
to  the  attention  of  the  residents  of  the  various  States  the  wisdom  and 
necessity  of  improving  methods  of  conveyancing  and  foreclosure,  of 
aboHshing  taxation  on  mortgages,  and  of  doing  away  with  exemp- 
tions, which  make  it  difficult  and  even  impossible  for  the  farmer  to 
obtain  loans,  which  he  could  readily  secure  if  such  exemptions  did  not 
exist  or  could  be  waived. 

Moreover,  the  commission,  as  above  stated,  recognized  the  neces- 
sity for  impressmg  these  national  land-bank  bonds  with  the  stamp  of 
approval  as  an  investment  for  savings  and  trust  funds,  so  that  tney 
would  immediately  be  accepted  along  with,  and  as  being  in  the  class 
with,  the  very  best  species  of  raih^oad  and  industrial  bonds. 

In  consequence,  in  section  34  the  bill  provides  that  the  national 
land-bank  bonds  can  be  received — 

First.  As  security  for  the  deposit  of  postal  savings  funds  in  farm- 
land banks  and  in  other  banks.  It  is  claimed  by  the  commission 
that  national  land-bank  bonds  issued  under  this  act  would  be 
absolutely  secure  and  would  constitute  an  ideal  security  for  postal 
savings  deposits.  Thereby  the  postal  savings  deposits,  accumulated 
to  a  large  extent  in  urban  centers,  would  be  available  for  the  devel- 
opment of  rural  communities.  Such  a  provision  at  once  places  na- 
tional land-bank  bonds  m  the  highest  class,  because  the  present  postal 
savings  law  require^  that  bonds  deposited  to  secure  postal  savuigs 
deposits  must  be  bonds  supported  by  the  taxing  power. 

Second.  These  national  land-bank  bonds  are  made  a  legal  invest- 
ment for  funds  accumulated  in  the  savings-banks  in  the  District  of 
Columbia  as  well  as  time  deposits  in  national  banks.  The  restric- 
tions surrounding  the  investment  of  funds  in  savings  banks  in  this 
country  have  been  so  rigid  and,  as  a  rule,  so  carefully  observed  that 
to  state  the  fact  that  a  bond  is  accepted  as  a  legal  investment  by 
savings  banks  impresses  it  at  once  as  the  very  highest  grade  of 
security.  These  bonds,  being  in  effect  first-mortgage  bonds  on  real 
estate,  are  preeminently  suited  for  such  investments,  and  in  this  way 
the  savings  funds  of  the  cities  will  be  made  available  for  the  develop- 
ment of  the  country. 

Third.  These  national  land-bank  bonds  are  made  a  legal  investment 
for  trust  funds  and  estates  under  charge  of  the  United  States  courts. 

Fourth.  They  are  made  available  as  security  for  loans  from  na- 
tional banking  associations  either  to  farm-land  banks  or  to  indi- 
viduals under  the  provisions  of  section  24  of  the  Federal  reserve  act. 
Under  that  section  national  banlcing  associations  are  allowed  to  lend 
not  over  25  per  cent  of  their  capital  stock  and  surplus  or  to  one-third 
of  its  time  deposits  on  the  security  of  farm  lands  at  not  exceeding 
50  per  cent  of  the  value  of  the  farm  land  for  not  exceeding  five 
years.  In  many  sections  this  privilege  extended  to  the  national 
banks  will  not  be  exercised  on  account  of  the  fact  that  the  national 
bank  frequently  is  situated  in  a  city,  remote  from  the  country  dis- 
tricts. But  if,  in  place  of  maldng  the  loan  directly  on  the  farm  land, 
the  national  bank  is  allowed  to  lend  the  money  to  the  farm-land 
bank  or  the  individual  on  the  security  of  national  land-bank  bonds, 
then  it  would  seem  that  a  great  part  of  this  available  amount  in  the 
national  banks  could  be  reached  by  the  farmers  to  meet  their  needs. 


AGRICULTURAL    CREDIT.  47 

The  foregoing  four  enuinerated  privileges  are  suggested  by  the 
commission  as  being  properly  applicable  to  national  land-bank  bonds. 

In  addition,  however,  the  commission  has  believed  that  it  would  be 
wise  to  vest  in  the  commissioner  of  farm-land  banks  the  power  to 
make  general  rules,  with  the  approval  of  the  Secretary  of  the  Treas- 
ury, extending  these  privileges,  or  certain  of  them,  only  to  farm- 
land banks  in  States  which  pass  laws  or  regulations  looking  toward 
uniformity  in  several  essential  particulars,  and  looking  toward  a 
simplification  of  laws  regarding  land^  titles.  That  is  to  say,  the 
commission  believes  that  the  commissioner  of  farm-land  banlvs 
should  be  given  the  power  to  extend  the  privileges,  or  some  of  them, 
by  general  rules  only  to  banks  in  those  States  which  have  done 
away  with  exemptions  as  regards  farm-land  loans,  or  to  banks  in 
those  States  which  have  simplified  methods  of  registration,  convey- 
ance, and  foreclosure,  or  to  banks  in  those  States  which  have  rdade 
national  land-bank  bonds  available  as  a  legal  investment  for  the 
funds  of  savings  banlvs  operating  in  that  State,  or  trust  funds  under 
the  control  of  courts  of  the  State,  or  as  a  legal  investment  for  reserves 
of  insurance  companies  operating  under  the  laws  of  that  State. 

It  is  believed  that  with  this  discretion  vested  in  the  commissioner 
of  farm-land  banks,  exercised  only  with  the  approval  of  the  Secretary 
of  the  Treasury,  general  rules  can  be  promulgated  from  time  to  time 
which  will  be  largely  instrumental  in  securing  uniformity  of  laws  in 
the  various  States  and  in  assuring  the  acceptance  of  these  national 
land-bank  bonds  as  a  legal  investment  for  the  great  accumulations 
of  savings  now  existing  in  banks  and  in  the  reserves  of  the  great 
insurance  companies.  If  laws  simplifying  the  registration  of  titles 
or  conveyance  of  lands  and  the  foreclosure  oi  mortgages,  abol- 
ishing taxation  of  mortgages,  can  be  brought  about  in  the  various 
States,  and  if  the  national  land-bank  bonds  can  become  a  recognized 
and  authorized  investment  for  the  funds  accumulated  in  State 
savings  banks,  in  the  reserves  of  insurance  companies,  in  the  savings- 
bank  departments  of  national  banks,  and  in  the  postal  savings 
banks,  then  the  national  land-bank  bond  will  become  a  recognized 
security  of  the  highest  class  and  the  farmer  will  have  obtained 
access  to  the  greatest  accumulations  of  capital  in  the  country,  just 
as  the  big  corporation  or  large  merchant  now  has  access  to  these 
or  similar  funds. 

Sections  35  and  36,  touching  examinations  of  banks  and  reports  of 
their  condition,  are  substantially  the  same  as  corresponding  pro- 
visions in  the  national  banking  act. 

Section  37,  regarding  dividends,  is  substantially  similar  in  its  first 
part  to  the  national  banking  act,  except  that  dividends  are  pro- 
hibited, not  only  when  they  impair  the  capital,  but  when  they  reduce 
the  capital  and  surplus  to  less  than  one-fifteenth  of  the  outstanding 
national  land-bank  bonds  of  the  bank.  Moreover,  in  the  case  of 
cooperative  banks  a  special  arrangement  for  the  distribution  of  earn- 
ings is  made  which  has  been  fully  treated  above  in  discussing  section 
14,  subdivision  (1).' 

Section  38  is  substantially  similar  to  the  corresponding  provisions 
of  the  national  banking  act. 

Section  39  provides  for  the  appointment  of  an  appraisement  com- 
mittee, and  requires  the  committee,  composed  of  three  directors,  to 
appraise  or  cause  to  be  appraised  all  iarm  land  upon  which  loans 
are  to  be  made,  which  appraisement  shaU  be  in  writmg,  signed  by  a 


48  AGKICULTURAL    CKEDIT. 

majority  of  the  committee.  The  appraisement  shall  contain  a  descrip- 
tion of  the  property,  the  value  at  which  it  is  appraised,  the  value 
at  which  it  is  assessed,  and  other  pertinent  information;  and  no  loan 
on  any  farm  land  can  be  made  unless  and  until  such  appraisement 
has  been  made  in  writing  and  filed.  It  is  hardly  necessary  to  discuss 
the  wisdom  of  this  pro^asion  in  handling  real-estate  loans. 

Section  40  provides  that  all  national  farm-land  banks  shall,  upon 
the  request  of  the  postal  savings  trustees,  receive  deposits  of  postal 
savings  funds  to  the  extent  of  one-half  of  their  capital  and  surplus  and 
pay  interest  thereon. 

The  question  has  been  raised  before  this  commission  as  to  whether 
the  powers  of  the  Federal  Government  embrace  the  power  to  estab- 
lish a  system  of  farm-land  banks.  After  some  investigation,  the 
commission  is  impressed  with  the  view  that  the  Government  has  this 
power,  but  it  is  strongly  impressed  wdth  the  view  that  no  possible 
question  can  be  raised  as  to  the  Government's  right  to  create  banks 
which  shall  act  as  depositories  for  funds  controlled  by  it.  Moreover, 
in  case  other  banks  should  refuse  to  receive  the  postal  savings  deposits 
and  pay  the  interest  requii'ed  thereon,  then  the  Government  could 
force  the  farm-land  banks  to  receive  such  deposits,  paying  therefor 
the  interest  required,  and  relieving  the  Government  of  any  possible 
danger  of  having  to  pay  the  interest  charges  on  these  deposits  in  the 
future  when  it  might  not  itseK  be  a  borrower  and  might  have  no 
need  for  these  large  accumulations. 

Section  41  provides  that  the  limitation  on  the  amount  of  deposits 
to  be  received  by  a  farm-land  bank  (which  prevents  it  from  receiving 
deposits  in  excess  of  50  per  cent  of  its  capital  and  surplus)  shall  not 
apply  to  postal  savings  deposits  or  other  governmental  deposits,  or 
to  State  deposits.  The  farm-land  banks  can  be  required  to  take 
postal  savings  deposits, to  the  extent  of  half  their  capital  and  surplus, 
but  they  are  authorized  to  take  postal  savmgs  or  governmental  deposits 
and  State  deposits  to  an  unlimited  extent. 

The  limitation  on  the  amount  of  deposits  which  the  farm-land 
bank  should  receive  from  individuals  has  been  heretofore  explained, 
and  the  reason  for  it  is  obvious.  Farm-land  banks  should  not  com- 
pete with  the  commercial  banks  m  getting  deposits.  They  should 
not  be  allowed  to  receive  an  unlimited  amount  of  ordinary  deposits, 
because  a  sudden  demand  for  such  deposits  would  naturally  embarrass 
an  institution  whose  principal  loans  run  over  a  period  of  years. 

But  the  deposit  of  postal-savings  funds  is  entirely  different.  While 
there  are  small  fluctuations  in  the  volume  of  such  deposits,  it  can 
be  safely  predicted  that  the  volume  wUl  continue  to  mcrease  when 
the  credit  of  the  Government  is  pledged  to  their  repayment.  These 
postal-savings  funds  are  held  by  the  Government  in  trust  and  have  to 
be  invested  in  some  way  or  else  deposited  with  some  institution  which 
can  provide  the  mterest. 

Secondly,  it  would  seem  peculiarly  fitting  that  these  deposits  should 
be  placed  with  the  farm-land  banks,  to  meet  the  needs  of  which  they 
are  peculiarly  adapted.  Likewise  with  other  Government  deposits. 
The  Government,  controlling  and  supervising  the  farm-land  banks, 
should  be  allowed  to  place  with  such  banks  any  deposits  that  it  may 
wish  to  so  place.  It  is  reasonable  to  presume  that,  if  the  National 
Government  will  place  its  funds  with  farm-land  banks,  the  State  gov- 
ernments will  be  willing  to  similarly  place  their  time  deposits,  or  some 


AGRICULTURAL   CREDIT.  49 

of  them,  with  such  banks.  It  is  provided  iii  tliis  section  that  the 
postal-savings  deposits  so  placed  wdth  the  bank,  except  the  5  per  cent 
reserve  required  under  the  postal-savings  act,  may  be  invested  in 
farm  loans  and  may  be  secured  by  the  deposit  of  national  land-bank 
bonds,  and  that  the  funds  deposited  by  a  State  may  be  invested  as 
provided  b}^  the  laws  of  the  State.  Provisions  for  keepmg  proper 
reserves  are  inserted,  following  largely  the  provisions  of  the  Federal 
reserve  act. 

Section  42 :  This  section  provides  that,  in*  case  buildmgs  form  any 
part  of  the  security  of  mortgage  loans,  they  shall  be  insured,  and  that 
the  insurance  pohcies  shall  be  properly  assigned  and  provision  made 
for  the  payment  of  the  premiums.  As  a  general  measure  of  protec- 
tion, it  is  provided  that,  in  appraising  property  for  loans,  buildings 
and  destructible  property  shall  not  be  valued  at  more  than  20  per 
cent  of  the  total  appraisement.  The  reason  for  this  is  that  farm- 
land loans  are,  as  herein  outlined,  loans  for  long  terms,  and  should 
be  based  on  indestructible  property  or  the  land.  On  the  other 
hand,  the  land  itself  is  frequently  made  more  valuable  by  the 
presence  of  the  buildings  necessary  to  its  use,  and  such  buildings 
should  receive  some  consideration.  By  limiting  the  value  of  the 
buildings  to  20  per  cent  of  the  appraised  value,  and  by  Umiting  the 
loans  to  50  per  cent  of  the  appraised  value,  it  will  mean  that  the 
ai)praised  value  of  the  land  alone  will  always  exceed  the  face  of  the 
mortgage,  because  the  appraised  value  of  the  land  itself  must  be  80 
per  cent  of  the  total  appraised  value,  and  the  loan  must  not  exceed 
50  per  cent  of  the  total  appraised  value. 

Section  43  prohibits  branch  banks,  but  authorizes  the  maintenance 
of  loan  agencies  throughout  the  State  in  wliich  the  bank  is  operated. 
The  necessity  and  propriety  of  such  loan  agencies  throughout  the 
State,  in  order  to  enable  the  bank  to  lend  its  funds,  are  apparent. 

Section  44  provides  for  the  maintenance  by  a  national  farm-land 
bank,  with  the  consent  of  the  commissioner  of  farm-land  banks,  of 
sales  agencies  either  within  or  wdthout  the  State,  to  sell  its  national 
land-bank  bonds.     The  necessity  for  this  is  apparent. 

Section  45  provides  how  the  rate  of  interest  to  be  charged  the 
farmer  is  to  be  arrived  at.  That  is  to  say,  the  farmer  is  to  be  charged 
an  amount  equal  to  the  rate  of  interest  to  be  borne  by  the  national 
land-bank  bonds,  plus  the  admmistration  charge  of  the  bank  (wliich 
can  not  exceed  1  per  cent  of  the  amount  unpaid),  plus  the  amortiza- 
tion payment.  This  has  been  fully  explained  above,  and  it  is  pro- 
vided that  the  amount  to  be  so  paid  periodically  shall  be  set  out  in 
every  mortgage,  and  shall  not  be  changed  during  the  term  of  the 
mortgage.  This  provision  is  in  the  interest  of  the  borrower  and  of 
the  investor. 

Section  46  provides  that  a  borrower  may  pay  off  his  indebtedness 
by  presenting  to  the  bank  its  national  land-bank  bonds  oi  the  same 
series  as  those  issued  against  his  mortgage. 

The  farmer  who  has  borrowed  $1,000  on  mortgage  from  a  national 
farm-land  bank  has  deliverc^d  his  mortgag(^  to  the  bank,  and  the  bank 
has  issued  a  series  of  perhaps  $100,000  of  national  land-bank  bonds 
against  his  mortgage  and  other  mortt^ages.  These  national  land-bank 
bonds  have  been  sold  to  the  general  public.  Thereafter  the  farmer 
comes  into  possession  of  certain  money,  and  he  finds  an  opportunity 
to  buy  some  of  the  national  land-bank  bonds  of  this  series  at  98 ;  he 
S.  Doc.  380,  63-2 4 


iuilXM 


50  AGRICULTURAL    CREDIT. 

purchases  these  bonds  at  98  and  presents  them  to  the  bank  in  settle- 
ment of  his  indebtedness  at  par.  Inasmuch  as  the  amount  of  mort- 
gages hckl  by  the  bank  is  of  the  par  value  of  the  amount  of  national 
land-bank  bonds  outstanding,  the  bank  can  lose  nothing  by  this 
transaction,  because  it  receives  $1,000  par  value  of  its  own  lancl-])ank 
bonds  of  the  same  series  in  payment  oi  a  mortgage  of  $1,000,  held  as 
security  for  those  bonds,  upon  receiving  its  national  land-bank 
bonds,  it  thereupon  cancels  the  same,  and  hkewise  cancels  and  delivers 
up  the  $1,000  mortgage  bi  the  farmer.  This  provision  encourages  the 
farmer  to  buy  the  national  land-bank  bonds  of  that  bank  when 
they  fall  below  par,  because  thereby  he  can  pay  off  his  mortgage  at 
less  than  its  face.  Such  a  provision  will  tend  to  maintain  the  market 
for  the  national  land-bank  bonds.  Likewise  the  bank  itself  can  buy 
its  bonds  in  the  market,  cancel  the  same,  and  thereby  release  a 
proportionate  part  of  the  mortgages  securing  such  issue.  This  like- 
wise tends  to  encourage  the  bank  to  invest  its  surplus  funds  in  its 
own  national  land-bank  bonds,  and  tends  to  maintain  the  market. 
But  all  of  these  cancellations  of  mortgages  securing  land-bank  bonds 
must  be  made  with  the  consent  of  the  Federal  fiduciary  agent.  While 
the  bank  can  buy  its  bonds  on  the  market  on  the  best  terms  possible, 
it  can  not  call  national  land-bank  bonds  for  payment  at  less  tnan  par. 
Section  47  provides  that  the  bank  shall  immediately  discharge  the 
hen  of  a  mortgage  whenever  payment  of  the  same  is  made.  The 
propriety  of  this  requirement  is  obvious. 

Section  48  gives  to  the  commissioner  of  farm-land  banks  the  power 
to  estabhsh  general  rules  and  regulations  prescribing  the  methods  of 
carrying  out  the  necessary  incidents  of  the  business  of  farm-land 
banking.  It  gives  him  general  power  to  supervise  all  national  farm- 
land banks,  and  to  prescribe  rules  and  regulations  for  their  conduct 
where  the  same  are  not  provided  under  the  act. 

Section  49  similarly  gives  him  general  powers  regarding  the  organi- 
zation and  operation  of  national  farm-land  banks. 

Section  50  foUows  the  general  provisions  of  the  similar  provisions 
in  the  Federal  reserve  act,  covering  violations  of  law. 

Section  51  repeals  all  acts  or  parts  of  acts  inconsistent  with  this  act. 

Duncan  U.  Fletcher,  Chairman. 

Thomas  P.  Gore. 

Ralph  W.  Moss,  Vice  Chairman. 

Harvie  Jordan. 

John  Lee  Coulter,  Secretary. 

Kenyon  L.  Butterfield. 

Clarence  J.  Owens. 


Appendix. 


SUGGESTED  LEGISLATION. 


51 


SUGGESTED  LEGISLATION. 

|See  pages  27  and  34  for  review  of  bill.] 


A  BILL  To  provide  for  the  establishment,  operation,  and  supervision 
of  a  national  farm-land  bank  system  in  the  United  States  of  America, 
for  the  creation  of  depositaries  for  postal  savings  and  other  public 
funds,  and  for  other  purposes. 

Be  it  eTiacted  hy  the  Senate  and  House  of  Representatives 
of  the    United  States  of  America  in   Congress  assembled, 
that  the  short  title  of  this  act  shall  be  ''National  farm-  ^^^^H  ^'"e  of 
land  bank  act." 

Sec.  2.  That  there  shall  bo  in  the  Department  of  the  la^dbS"^""' 
Treasury  a  bureau  charged  vnth  the  execution  of  all  laws 
passed  by  Congress  relating  to  the  creation  and  supervi- 
sion of  farm-land  banks,  the  chief  officer  of  which  bureau 
shall  be  known  as  the  commissioner  of  farm-land  banks,  ^Commissioner, 
and  shall  perform  his  duties  under  the  general  direction 
of  the  Secretary  of  the  Treasury. 

Sec.  3.  That  the  commissioner  of  farm-land  banks  shall  and'tennof'^ffi^* 
be  appointed  by  the  President,  by  and  with  the  advice 
and  consent  of  the  Senate,  and  shall  hold  office  for  the 
term  of  five  years,  unless  sooner  removed  by  the  Presi- 
dent upon  reasons  to  be  communicated  by  him  to  the 
Senate;  and  he  shall  be  entitled  to  a  salary  of  $6,000  a 
year. 

The  commissioner  of  farm-land  banks  shall,  within  oath  and  bond, 
fifteen  days  of  notice  of  his  appointment,  take  and  sub- 
scribe the  oath  of  office,  and  he  shall  give  to  the  United 
States  a  bond  in  the  penalty  of  $50,000,  with  surety  or 
sureties  to  be  approved  by  the  Secretary  of  the  Treasury, 
conditioned  for  tlie  faitliful  discharge  of  the  duties  of  his 
office. 

Sec.  4.  That  the  Secretary  of  the  Treasury,  at  tlie  re-  ^J^^P^j.  ''°°^' 
quest  of  the  commissioner  of  farm-land  banks,  may  ap- 
point one  deputy  commissioner,  who  shall  be  entitled  to 
a  salary  of  $3,500  per  year,  and  who  shall  possess  such 
powers  and  perform  such  duties  under  the  commissioner 
as  he  shall  direct.  During  a  vacancy  in  the  office  of  the 
commissioner,  or  during  his  absence  or  inability,  the 
deputy  commissioner  shall  possess  the  powers  and  per- 
form the  duties  attached  by  law  to  the  office  of  the  com- 
missioner. The  deputy  commissioner  shall  take  the  oath 
of  office,  and  shall  give  a  like  Ijond  in  the  penalty  of 
$30,000. 

Sec.  5.  That  the  commissioner  of  farm-land  banks  shall    ^^*^- 
adopt  a  seal  of  office  to  be  approved  by  the  Secretary  of 
the  Treasury,  a  description  of  which  seal,  together  with  an 


54  AGRICULTURAL    CREDIT. 

impression  thereof  and  a  certificate  of  approval  thereof 
signed  by  the  Secretary  of  the  Treasury,  shall  be  fded  in 
the  office  of  the  Secretary  of  State, 
itooms.  Sec.  6.  That  there  shall  be  assigned  from  time  to  time 

to  the  commissioner  of  farm-land  banks  by  the  Secretary 
of  the  Treasury  rooms  for  conducting  the  business  of  the 
bureau  of  farm-land  banks,  containing  safe  and  secure 
fii-eproof  vaults  in  which  the  commissioner  shall  keep  all 
original  articles  of  association  and  other  valuable  docu- 
ments and  things  belonging  to  his  department;  and  the 
commissioner  shall  from  time  to  time  furnish  the  neces- 
sary furniture,  stationery,  and  other  proper  conveniences 
for  the  transaction  of  the  business  of  his  office. 
Clerks.  Ti^es  commissioner  shall  employ  from  time  to  time  the 

necessary  clerks,  to  be  appomted  and  classified  by  the 
Secretary  of  the  Treasury,  to  discharge  such  duties  as  the 
commissioner  shall  direct. 
laM  bank°^"™"      ^^^-  '^ '  '^^^*'  ^^  shall  not  be  lawful  for  the  commissioner 
or  deputy  commissioner,  or  for  any  clerk  employed  in  the 
bureau  of  farm-land  banks,  either  directly  or  mdirectly,  to 
be  interested  in  any  farm-land  bank  formed  pursuant  to 
the  provisions  of  this  act. 
f'^'Jhe^'c  "^°^'     ^^^-  ^-  That  the  commissioner  shall  make  an  annual 
sioner.  rcDort  to  Cougress  at  the  commencement  of  its  session, 

exhibiting : 

First.  A  summary  of  the  state  and  condition  of  every 
farm-land  bank  from  which  reports  have  been  received 
during  the  preceding  year,  at  the  several  dates  to  which 
such  reports  refer,  with  an  abstract  of  the  whole  amount 
of  mortgages  or  deeds  of  trust  held  by  them  and  collateral 
trust  bonds  (hereinafter  described  as  national  land-bank 
bonds)  issued  by  them,  the  whole  amount  of  their  other 
assets  and  liabilities,  the  amount  of  their  capital  stock, 
and  such  other  information  in  relation  to  such  companies 
as  in  his  judgment  may  be  useful  or  as  may  be  requested 
by  Congress. 

Second.  A  statement  of  the  companies  whose  business 
has  been  closed  durmg  the  year,  with  the  amount  of  their 
mortgages  or  deeds  of  trust  and  of  their  national  land- 
bank  bonds  redeemed  and  the  amount  outstanding. 

Tliird.  Any  other  information  which  he  may  deem 
desirable  to  present  and  such  special  information  as  may 
be  called  for  by  Congress. 

Fourth.  The  names  and  compensation  of  the  clerks  em- 
ployed by  him,  and  the  whole  amount  of  the  expenses  of 
the  bureau  of  farm-land  banks  during  the  year,  together 
with  a  full  and  complete  list  of  all  officei-s,  agents,  clerks, 
and  other  employees  of  his  office,  mcludmg  examiners, 
receivei-s,  and  attorneys  for  receivei"s,  and  clerks  em- 
])loyed  by  them,  or  any  other  person  connected  with  the 
work  of  said  bureau  in  Washington  or  elsewhere  whose 
salaiy  or  compensation  is  ])aid  from  the  Treasury  of  the 
United  States  or  assessed  against  or  collected  from  exist- 
ing or  failed   com})anies   iindei-  supervision   or  control. 


AGRICULTLTKAL    CREDIT.  55 

When  the  annual  report  provided  for  in  the  last  sec-  re''on"°*' "'  ^^^ 
tion  is  completed,  or  while  it  is  in  process  of  completion 
if  thereby  the  business  may  be  sooner  dLspatclied,  the 
work  of  prmting  shall  be  commenced  under  the  superin- 
tendence of  the  Secretary  of  the  Treasury,  and  the  whole 
shall  be  printed  and  ready  for  delivery  on  or  before  the 
first  day  of  December  next  after  the  close  of  the  fiscal 
year  to  which  the  report  relates.  There  shall  be  printed 
not  to  exceed  ten  thousand  copies;  one  thousand  for  the 
Senate,  two  thousand  for  the  House,  and  the  remainder 
for  distribution  by  the  commissioner. 

Sec.  9.  That  within  ninety  days  after  the  approval  of  be^a^(S''t«i'with° 
this  act,  or  as  soon  thereafter  as  may  be,  the  Secretary  of  in  90  days. 
the  Treasury  shall  formulate  and  adopt  the  plans,  rules, 
and  regulations  governing  the  operations  of  the  bureau 
of  farm-land  banks,  m  accordance  with  this  act,  which 
plans,  rules,  and  regulations  shall  be  enforced  by  the  said 
commissioner  of  farm-land  banks. 

POWERS  OF  COMMISSIONER  OF  FARM-LAND  BANKS. 

Sec.  10.  That  the  commissioner    of  farm-land   banks   .^^„^TPp';%t'''n 

,        .        ,  ,  ,  , .  .  of  national  larm- 

is  authorized  and  empowered  upon  proper  application  to  land  banks, 
issue  charters  or  certificates  of  incorporation  for  the  es- 
tablishment of  national  farm-land  banks  as  herein  pro- 
vided for;  and  to  exercise  supervision  and  control  over, 
and  make  examinations  of,  all  of  the  national  farm-land 
banks  established  under  this  act,  under  such  general  rules 
and  regulations  as  may  be  provided;  and  to  withdraw  or 
forfeit  such  charters  or  Uquidate  such  banks  whenever 
necessary,  in  accordance  with  rules  to  be  provided,  sub- 

i'ect  in  all  respects  to  the  requirements  and  provisions 
lerein  contained. 

Sec.  11.    That   the   said   commissioner    of   farm-land  j^^^^^^'^f^^^^ 
banks  is  hereby  authorized,  by  general  rules  and  regula-  withhold  privi- 
tions  to  be  approved  by  the  Secretary  of  the  Treasury,  herounderf ^^^"^ 
applicable  alike  to  all  the  national  farm-land  banks  or- 
ganized hereunder,  to  specify  the  conditions  under  which 
the  privileges  herein  authorized  to  be  granted  to  all  said 
national    farm-land    banks    shall   be   extended   to   such 
banks;  and  particularly  to  provide  for  the  extension  of 
such  privileges  only  to  national  farm-land  banks  operat- 
ing in  those  States  which,  by  the  passage  of  suitable  laws, 
have  met  the  requirements  of  the  said  commissioner  of 
farm-land  banks  (1)  as  to  the  simphlication  of  land-title  ^;4i|^,,.J/^^d  titles 
registration  and  conveyancing,  (2)  as  to  the  simplifica-    (2)  MortpaRBs 
tion,  promptness,  and  economy  of  methods  of  securing  siinpuned!*^  "'""^^ 
farm-land  loans  and  of  foreclosing  the  same,  and  as  to 
other  matters  sis  more  fully  set  out  in  section  34  of  this 
act.     And    the    said  commissioner   of   farm-land    banks 
shall,  by  like  general  rules  and  regulations  to  be  approved 
by  the  Secretary  of  the  Treasury,  have  the  power  to  spec-  fy  y^me*" '"  ^^^^' 
ify  the  time  when  such  rules  and  regulations  or  certain 
of  them  shall  go  into  effect,  and  the  time  within  which 


56  AGEICULTUKAL    CREDIT. 

such  conditions  or  certain  of  them  must  be  compHed  with, 
And  to  extend  g^j^^j  iq  extend  such  time,  and  to  withhold  such  privileges 
or  certain  of  them  from  the  national   farm-land  banks 
operating  in  any  State  failing  to  comply  \\'ith  the  required 
provisions  and  regulations,  until  the  same  are  fully  com- 
plied with. 
tabi"s°'^how '?e"      ^^^-  ^^-  That  the  commissioner  of  farm-land  banks,  by 
pared.'  and  with  the  approval  of  the  Secretary  of  the  Treasury, 

shall  from  time  to  time  prepare  and  pubUsh  amortization 
tables,  covering  periods  of  from  six  to  thirty-five  years,  at 
varying  rates  of  interest,  to  meet  all  the  requirements  of 
the  banks  organized  hereunder.  Such  tables  shall  be 
adopted  and  used  by  all  of  such  banks  as  the  basis  of  all 
repayments  of  long-term  mortgage  loans  herein  provided 
for. 

Incorporation  of  National  Farm-Lant)  Banks. 

land-bank  ^m"'  ^^^'  ^^-  ^hat  the  associatious  for  carrymg  on  the  busi- 
be  formed  by  any  ncss  of  farm-laiid  banking  under  this  act  may  be  formed 
lopersons.  -^^  ^^^y.  j^umber  of  natural  persons,  not  less  in  an^  case 

than  ten.  They  shall  enter  into  articles  of  association, 
which  shall  specify  in  general  terms  the  object  for  which 
the  association  is  formed,  and  may  contam  any  other  pro- 
visions not  inconsistent  with  law  which  the  association 
may  see  fit  to  adopt  for  the  regulation  of  its  business  and 
the  conduct  of  its  affairs.  These  articles  shall  be  signed 
by  the  persons  uniting  to  form  the  association,  and  a  copy 
of  them  shall  be  forwarded  to  the  commissioner  of  farm- 
land banks  to  be  filed  and  preserved  in  his  office, 
certifiratetof  M^  ^^^-  ^^-  That  the  persons  uniting  to  form  such  a  na- 
ify.    ^      *       tional  farm-land  bank  shall,  under  their  hands,  make  an 

organization  certificate,  which  shall  specifically  state: 
name'^^'    ^^^      First.  The  name  assumed  by  such  association.     The 
words  "  national  farm-land  bank"  shall  be  apart  of  the 
title  of  every  such  institution,  and  these  words  shall  not 
be  used  by  any  institution  other  than  those  incorporated 
under  this   act:  Provided,  however,  That  if  the  persons 
uniting  to  form  such  a   national    farm-land  bank  shall 
h&nis^^^^^^^^  wish  to   apply  cooperative  principles  in   the  formation 
and   management   of    the    same,   the    words    "national 
farm-land  bank,  cooperative,"  shall  be  a  part  of  the  title; 
and  the  word  "cooperative"  shall  not  be  used  by  any 
national  farm-land  bank  other  than  those  which  accept 
the  following  principles    and    jirovide  in   their  by-laws 
that — 
gjjStock  owner.      (^^  ]sj^q  stockholder  shall  own  more  than  ten  per  centum 
of  the  share  capital  at  any  time. 
Voting.  (5)  j^^  j^jl  meetings  of  the  stockholdei-s  of  such  bank- 

ing corporation  each  stockholder  shall  have  one  vote  and 
only  one  on  all  matters  pertainuig  to  the  organization  or 
management  of  the  institution,  irrespective  of  the  num- 
ber of  shares  of  stock  owned  by  such  stockholder. 


AGRICULTURAL    CREDIT.  57 

(c)  The  net  earnings  of  such  banking  corporation  avail-    i>'""dends. 
able  and  set  aside  for  the  paynient  of  interest  and  divi- 
dends shall  be  distributed  as  follows: 

To  each  owner  of  stock  of  such  corporation  may  first 
be  paid  a  dividend  in  the  form  of  interest  upon  the  par 
value  of  the  shares  of  stock  o^vaied  by  sucn  owner  of 
stock,  computed  at  the  rate  of  interest  generally  prevail- 
ing in  the  community  where  such  bank  is  located,  out  not 
exceedmg  the  legal  rate  of  interest  iri  the  State  where 
such  banking  corporation  is  situated,  if  said  earnings  are 
sufficient  for  that  purpose;  otherwise,  to  be  paid  to  each 
owner  of  such  stock  pro  rata  computed  upon  the  par 
value  of  such  stock.  The  balance  of  such  net  earnings, 
if  any,  shall  be  distributed  among  the  patrons  of  such 
banking  corporation  m  proportion  to  the  amount  of  busi- 
ness transacted  with  such  bank:  Provided,  hoivever,  That 
in  such  distribution  the  share-owning  patrons  may,  if 
approved  by  a  two-thii-ds  vote,  take  dividends  at  a  rate 
twice  as  great  as  that  paid  to  the  non-share-owning 
patrons. 

(d)  The  shares  of  stock  of  such  national  farm-land  ^^fl^_  '^''^"^  "' 
banks,  cooperative,  may  be  of  the  par  value  of  $25  each. 

(e)  In  all  other  respects  such  national  farm-land  1^^^^^^°^^^''  '*''' 
banks,  cooperative,  shall  conform  to  and   be  governed 

by  the  general  laws  as  herein  provided. 

The  words  "national  farm-land  bank"  or  ''national 
farm-land  bank,  cooperative,"  shall  be  prefixed  by  such 
descriptive  title  or  name  as  the  applicants  may  indi- 
cate, subject  to  the  approval  of  the  commissioner  of  farm- 
land banks.  Each  said  national  farm-land  bank  shall  be 
designated  by  an  official  n-umber  provided  by  the  com- ^^^^^'"^^  ""™- 
missioner  of  farm-land  banks. 

Second.  The  State  in  which  the  operations  of  such  g^f^^Xrl^' Jnk 
national  farm-land  banks  are  to  be  carried  on,  and  the  wm  operate  and 
place  in  said  State  where  its  principal  office  is   to  be  ^  ^   omeo.ice. 
located,  which  place  may  be  changed  from  time  to  time 
upon  the  request  of  such  national  farm-land  bank,  with 
the  approval  of  the  commissioner  of  farm-land  banks. 

Thii'd.  The  amount  of  capital  stock,  and  the  number  of  ofca^p^fautocT* 
shares  into  which  the  same  is  to  be  divided:  Provided, 
That  such  capital  stock  shall  in  no  case  be  less  than    Minimum. 
$10,000:  And  provided  furtlier,  That  such  capital  stock 
may  be  increased  or  decreased  from  time  to  time,  subject  ^^^J.^g^^*r^j^^jg^"g 
to  the  approval  of  the  commissioner  of  farm-land  banks,  stock. 
but  at  no  time  to  be  less  than  the  minimum  herein  set 
forth. 

Fourth.  The  names,   and  places  of  residence  of  the  ^ J^'^J^'i'^j^^^.'^f  ^^ 
shareholders,  and  the  number  of  shares  held  by  each  of  shareholders. 
them. 

Fifth.  The  fact  that  the  certificate  is  made  to  enable  of ciruiicai;'."'"''' 
such  persons  to  avail  themselves  of  the  advantages  of 
this  act. 

Sec.  15.  That  the  organization  certificate  shall  l>o  ^^^^j^fi^^fi^/^^^'"" 
acknowledged  before  a  judge  of  some  court  of  record,  or  now  acknowi- 
before  a  notary  public,  and  shall  be,  together  with  the  *^^"'^^" 


58  AGRICULTURAL   CREDIT. 

Authenticated,  acknowlodgmoiit  thereto,  authenticated  by  the  seal  of 
such  court  or  notary  pubHc,  transmitted  to  the  commis- 

Recorded.  siouer  of  farm-land  banks,  who  shall  record  and  carefully 
preserve  the  same  in  his  office. 

Powers   and   Limitations    of   National   Farm-Land 

Banks. 

general  powers. 

of ^r atlonat^flrm-  Sec ,  1 6 .  That  upon  duly  making  and  filing  the  articles  of 
land  banks  effect  association  and  an  organization  certificate,  the  associa- 
*^^''"  tion  shall  become,  as  from  the  date  of  the  execution  of 

its  organization  certificate,  a   body  corporate;   and   as 
such,  and  in  the  name  designated  in  the  organization  cer- 
Generai powers,  tificatc,  shall  havc  power: 
s^aT'  ^°  ^^°^^      First.  To  adopt  and  use  a  corporate  seal. 
sooond.  Tocon-      Sccoud.  To  havc  succcssion  for  the  period  of  fifty  years 
uSefs^dissoived"!^  from  its  Organization,  unless  it  is  sooner  dissolved  accord- 
ing to  the  provisions  of  its  articles  of  association  or  by 
the  act  of  its  shareholders  owning  two-thirds  of  its  capital 
stock;  except  that,  in  the  case  of  cooperative  farm-land 
banks,  a  vote  of  two-thirds  of  the  stockholders  shall  be 
Foifeit«d.        necessary,  or   unless   its  franchise  becomes  forfeited  by 
some  violation  of  law:  Provided,  That  the  charters  of  all 
national  farm-land  banks  shall  be  at  all  times  subject  to 
Amended.        change,  amendment,  or  repeal  under  general  laws  enacted 
by  Congress:  Provided,  That  no  such  change,  amendment, 
Rights  of  cred-  qj.  repeal  shall  in  any  way  affect  the  rights  of  the  creditors 
of  such  national  i arm-land  banks. 
tract'"'^'  '^°  """"      Third.  To  make  contracts. 

Fourth.  To  sue  Fourth.  To  suc  and  be  sued,  complain  and  defend  in 
and  be  sued.  ^^^  court  of  law  and  equity  as  fully  as  natural  persons. 
directors  I  Vom-  Fifth.  To  elect  or  appoint  not  less  than  five  nor  more 
cers.  than  nine  directors,  and  by  its  board  of  directors  to  ap- 

point a   president,  vice-president,  and  other  officers,  to 
define  their  duties,  require  bonds  of  them,  and  fix  the 
ofrn-er™'^^'     °'  penalty  thereof,  dismiss  such  officere  or  any  of  them  at 
pleasure,  and  appoint  others  to  fill  their  places :  Provided, 
ar^l^se^t  noum-  That  the  officer  herein  described  as  Federal  fiduciary  agent 
der  their  control,  shall  not  be  subjcct  to  removal  by  the  board  of  directors 
or  officers  of  said  bank,  but  shall  be  subject  to  removal 
only  by  the  commissioner  of  farm-land  banks, 
b  4a4's'^**'^*^^      Sixth.  To  prescribe  by-laws  not  inconsistent  with  law, 
regulating  the  manner  in  which  its  stock  shall  be  trans- 
ferred, its   directors  shall  be  elected  or  ap[)ointed,   its 
officers  elected  or  appointed,  its  property  transferred,  its 
general  business  conducted,  and  the  privileges  granted  to 
it  by  law  exercised  and  enjoyed,  except  that  in  the  case  of 
cooperative  farm-land  banks  the  by-laws  shall  be  ap- 
proved by  two-thirds  of  the  stockholders  before  being 
adopted  and  put  into  effect, 
exerdse^tacidwi"      Seventh.  To  exercise  by  its  board  of  directors  or  duly 
tai powers.         authorized  ojBBcers  or  agents,  subject  to  law,  all  such  in- 


AGRICULTURAL    CREDIT.  59 

cidental  powers  as  shall  bo  necessary  to  carry  on  the 
business  of  farm-land  banking:  Provided,  That  the  powers    Proviso. 
of  such  association  shall  include  the  following  specific 
powers   and  shall  be  subject  to   the  foUowmg  specific 
restrictions: 

A.    SPECIFIC    POWERS. 

Every  national  farm-land  bank  shall  have  the  following  specific  powers. 
specific  powers: 

(a)  To  accept  and  pay  mterest  on  deposits  to  an  ^jeposi^"  ^"^^^^^ 
amount  not  exceeding  fifty  per  centum  of  the  amount  of 
its  combined  paid-up  capital  and  surplus;  to  receive  de- 
posits of  postal  savings  funds  to  the  same  extent  and  to 
pay  interest  thereon  at  the  rate  required  of  other  banks 
receiving  such  deposits.  The  trustees  of  the  Postal 
Savmgs  System  are  hereby  authorized  and  empowered 
to  select  national  farm-land  banks  as  depositories  for 
such  funds,  which  banks,  when  required  by  the  Secre- 
tary of  the  Treasury,  shall  act  as  fiscal  agent  of  the 
United  States. 

(6)  To  make  loans  upon  farm  lands  anywhere  within  j^^^>J^^^7°^°° 
the  State  in  which  such  national  farm-land  bank  is  op-  state:  Provided. 
eratod:  Provided, 

(1 )  That  such  loans  are  made  for  not  more  than  thirty-  not^mo^eXn'as 
five  years.  years. 

(2)  That  such  loans  are  secured  by  a  first  mortgage  or  se^u^red'^br  first 
first  deed  of  trust  on  farm  lands.  mortgage. " 

(3)  That  such  loans  shall  be  made  for  any  of  the  fol-  Jang.^'^'P'"®^  °' 
lowing  purposes: 

(a)  To  complete  the  purchase  of  the  agricultural  lands 
mortgaged. 

(6)  To  improve  and  equip  such  lands  for  agricultural 
pmposes. 

{c)  To  pay  and  discharge  debts  secured  by  mortgages 
or  deeds  of  trust  on  said  lands. 

(4)  That  such  loans  do  not  exceed  fifty  per  centum  in  j ted \ J rlrf "ercmt 
amount  in  the  case  of  improved  farm  lands,  and  do  not  of  improved  and 
exceed  forty  per  centum  in  amount  in  other  cases,  of  the  improvTcf  f°ar"m 
value  of  the  said  lands;  to  be  determined  by  an  appraisal,  i'*°'^^- 

as  provided  in  tliis  act. 

(5)  That  every  such  farm-land  loan  contain  a  manda-  containTrov^'on 
tory  provision  for  the  amortization  of  such  loan,  or  reduc-  for  amortization. 
tion  of  the  same  by  annual  or  semiannual  payments  on 

account  of  prmcipal :  Provided,  That  the  loan  extends  over    Proviso. 
a  period  exceeding  five  years. 

(6)  That  every  such  loan  may  be  paid  off  in  whole  or  J^,^a|d°''oli'  aft^ 
in  part  by  the  borrower,  in  accordance  with  rules  to  be  five  years, 
prescribed  by  the  commissioner  of  farm-land  banks,  at 

any  interest  period,  after  such  loan  has  continued  for  five 
years,  by  the  payment  of  the  whole  or  a  part  of  such  loan, 
with  interest  to  such  date,  after  crediting  the  amortiza- 
tion payments  on  the  same  as  and  when  they  were  made. 

(c)  To  issue,  sell,  and  trade  in  its  own  collateral  trust  ^^^'^^ '[^'^^^'^^f^^^'^ 
bonds  which  shall  be  known  and  described  as  "'^'i^i'"^'^!  r^,J,i  b",',^^''*"'** 
land-bank  bonds "  secured  by  the  deposit,  as  elsewhere 


60  AGKICULTURAL    CREDIT. 

herein  provided,  of  first  mortgages  or  first  deeds  of  trust 
(and  oi  notes  or  bonds  secured  thereby),  in  an  amount 
equal  at  least  to  the  face  value  of  the  national  land-bank 
bonds  so  issued  and  sold  by  the  said  bank:  Provided, 
oninter^trSo  p)  That  the  Tate  of  interest  upon  the  farm-land  loans 
fanners.  evidenced  by  the  mortgages  or  deeds  of  trust  held  by  the 

bank  as  security  for  its  own  national  land-bank  bonds 
shall  not  exceed  the  rate  of  interest  paid  on  such  national 
land-bank  bonds  by  more  than  one  per  centum  annually 
upon  the  amount  unpaid  on  the  loan,  which  said  one  per 
centum  shall  cover  all  charges  of  administration, 
lid-bmk 'bounds      .(2)  That  all  national  land-bank  bonds  issued  by  the 
subject  to  cau  at  said  bank  shall  be  payable  on  a  date  specified  and  shall 
^^'  be  subject  to  call  at  par,  at  any  interest  period,  after  the 

date  of  issue,  or  after  a  specified  time,  by  such  proper  notice 
and  advertisement  as  may  be  provided  by  the  commis- 
sioner of  farm-land  banks. 
la^d-b'Lnk 'bonds  (3)  That  such  national  land-bank  bonds  shall  be 
leSt^^'ln  \  u^i  ^•^'^'''^ys  protected  by  the  deposit,  as  security  therefor,  of 
amount  of  *^f?irm  at  Icast  an  cqual  amount  in  face  value  of  first  mortgage  or 
loans.  £pg^  deed  of  trust  farm  loans  (and  of  notes  or  bonds  secured 

thereby) ,  maturing  not  less  than  five  years  after  their  date. 
iMd-bink 'bonds  (4)  That  as  the  amortization  payments  are  credited 
to  be  retired  as  upon  the  first  mortgage  or  first  deecl  of  trust  farm  loans 
ing  them  are  paid  so  deposited  as  sccurity,  the  national  land-bank  bonds 
°^-  issued  by  the  bank  and  secured  thereby  sliall  be  called 

and  paid,  or  purchased  in  the  open  market  and  retired, 
to  the  extent  of  the  credits  made  upon  such  first  mort- 
gage or  first  deed  of  trust  farm  loans  held  as  security  for 
the  same,  under  rules  and  regulations  made  by  the  com- 
missioner of  farm-land  banks. 
gaSsSn']!na:      (5)  That  the  first  mortgage  or  first  deed  of  trust  farm 

bXlshekr'oi'nti'^^*^''^^^^.  ^^^^^  ^^^'  ^^^^^^  ^^^^  bonds  secured  thereby)  held  as 

byT)ankVndTed^  sccurity  for  sucli  national  land-bank  bonds  shall  at  all  times 

agent^! '' " ' '  '"^  "^  be  in  the  jomt  possession  and  under  the  joint  control  of  the 

said  bank  ancl  of  the  Federal  fiduciary  agent  hereinafter 

ter^how  kepf ''^'  providcd  for,  and  that  a  register  of  such  first  mortgages  or 

first  deeds  of  trust  shall  be  at  all  times  kept  by  the  bank, 

entries  or  cancellations  in  which  shall  only  be  made  with 

the  approval  in  writing  of  such  Federal  fiduciary  agent. 

,  ('■>)  National       (6)  That  uo  national  land-bank  bond  shall  be  issued 

land-bank  bonds  •,  ,  ^        ^       p    ,  ,     /  ,  ii 

based onflve-year  against  any  mortgage,  deed  of  trust  (or  notes  or  bonds 
loans.  secured  thereby)  which  falls  due  earlier  than  five  years 

after  its  date. 
tailndsutpim'E^s  (<^)  To  use  its  Capital  stock,  surplus,  and  deposits  as  a 
revolving  fund,  rcvolvuig  fund  for  the  temporary  purchase  or  holding  of 
such  first  mortgage  or  first  deed  of  trust  farm  loans;  or  to 
use  tJie  same  for  the  purpose  of  buying  in  its  national  land- 
bank  bonds  and  of  holding  them  temporarily,  so  as  to 
maintain  the  price  of  the  same;  or  to  loan  its  capital  and 
surplus  on  first  mortgages  or  first  deeds  of  trust  for  a 
period  not  exceeding  five  years:  Provided,  That  not  to 
exceed  fifty  per  centum  of  such  capital  and  surplus  may 
be    permanently    invested    in    such    national-land-bank 


AGEICULTUEAL    CREDIT.  61 

bonds  and  in  first  mortgage  or  first  deed-of-trust  farm 
loans,  and  the  remainder  of  the  capital  and  surplus  can  be 
permanently  invested  only  in  United  States  Government 
bonds,  in  the  bonds  of  the  State  in  which  such  bank  is 
operating,  or  in  such  other  securities  as  may  be  author- 
ized by  the  commissioner  of  farm-land  banks. 

(e)  To  buy  and  sell  gold  and  silver  com  and  bullion ;  erai  blnking  ifuS- 
to  collect  notes,  drafts,  and  bills  of  exchange;  to  discount  ness  as  regards  its 

.    1  1        xi  1        V    i  J      J      1     •      deposits  and  de- 

commercial  and  other  short-term  paper  and  deal  m  positors. 
national  land-bank  bonds  of  other  farm-land  banks  with 
its  deposits;  to  keep  reciprocal  accounts  with  other  banks; 
to  rediscount  its  commercial  and  other  short-term  paper 
with  other  banks;  and  to  carry  on  a  general  banking  busi- 
ness so  far  as  its  current  deposits  are  concerned :  Provided, 
That  such  deposits  do  not  exceed  fifty  per  centum  of  its 
capital  and  surplus,  except  as  elsewhere  heren  specified. 
Provided,  however,  That  farm-land  banks,  cooperative, 
may  for  and  with  their  stockholders  also  do  and  transact 
the  busmess  now  possessed  and  exercised  by  national 
banks  under  the  laws  of  the  United  States,  under  such 
rules  and  regulations  as  may  be  prescribed  by  the  com- 
missioner of  farm-land  banks. 

B.    SPECIFIC    LIMITATIONS. 

Every  national  farm-land  bank  shall  be  subject  to  the  tio^iS!"^°  "™^" 
following  specific  limitations: 

(a)  The  amount  of  national  land-bankbonds  that  may  iand.ba4*  b°ondi 
be  issued  and  outstanding  at  any  one  time  by  such  J^^"  flf"'^4"°iJ^eg'c|°l 
tional  farm-land  bank  shall  not  exceed  fifteen  times  its  itafand'^^iuT 
capital  and  accumulated  surplus. 

(b)  The  charges  of  administration  imposed  by  such  ^j^^^^^^'^;^™!^'^^ 
national  farm-land  bank  upon  the  borrower  for  handling  no^^  exceed  i  per 
such  loan  shall  not  in  eacJi  instance  exceed  an  annual  ^'^'^  " 
charge  of  one  per  centum  upon  the  amount  unpaid  on  the 

loan. 

(c)  The  payments  to  be  made  annually,  or_semiannu-p^(«)^p^^^/'j°'^^ 
ally,  by  the  borrower  shall  in  all  cases  be  sufficient  to  j)ay  sufficient  in 
the  interest  charge  upon  the  loan,  the  administration  fnierest  charges 
charges  of  the  bank,  and  an  amortization  payment  sufli- '^^^  ^™°''**^^'^'°°- 
cicnt  to  retire  and  pay  oft'  the  amount  of  the  principal 
borrowed  (as  evidenced  by  the  face  of  said  first  mortgage 

or  first  deed  of  ti"ust  and  the  notes  or  bonds  secured 
thereby) ,  at  its  maturity. 

(d)  No  national  farm-land  bank  shall  at  any  time  loan  st^f^.^°^°^°^*'° 
any  money  upon  the  faith  or  credit,  or  upon  the  assign- 
ment, of  its  own  stock,  or  of  the  stock  of  any  other  na- 
tional farm -land  bank ;  nor  shall  any  national  farm-land 

bank  loan  to,  or  on  the  credit  of  any  one  individual  or 
institution,  either  on  the  security  of  land  or  on  any  other  ^  No  single  loan 

.,  '  ,     .  J     i  i  X    „         i?  to  exceed  20  per 

security,  an  amount  in  excess  ol  twenty  per  centum  oi  cent   of  capital 
the  sum  ol  its  then  paid-in  capital  and  surplus.  and  surplus. 

Eighth.  But  no  national  farm-land  bank  shall  transact  trMs^]j!,^no  bank" 
any  business  except  such  as  is  incidental  and  necessarily  ing>usijipss until 
preliminary  to  its  organization  until  it  has  been  author- 


g2  AGRICULTURAL    CREDIT. 

ized  to  commence  business  by  the  commissioner  of  farm- 
land banks. 

Holdings  of  Real  Estate. 

What  real  es-  Sec.  17.  That  a  national  farm-land  bank  may  puFcliase, 
tatemaybeheid.j^^^^^^  and  convey  real  estate  for  the  following  purposes 
and  for  no  others : 

First.  Bank  First.  Such  as  shall  be  necessary  for  its  immediate 
buudings.  accommodation  in  the  transaction  of  its  business. 

Second.  Mort-  Sccond.  Such  as  shall  be  mortgaged  to  it  by  way  of 
gage  proper  y.  gg^^^^.-^.^  £qj.  Iq^us  made  by  it,  as  elsewhere  herein  pro- 
vided 

Third.  Land  Third.  Such  as  shall  be  conveyed  to  it  in  satisfaction  of 
debt^^*'  *°  "  '"^  debts  contracted  in  the  course  of  business  dealings. 

^cMscd  undS  Fourth.  Such  as  it  shall  purchase  at  sale  imder  judg- 
fu"d^^mOTtso"forc-nients,  decrees,  or  mortgages  or  deeds  of  trust,  held  by 
cuTdeVs''dIfeTt:the  bank,  or  shall  purchase  to  secure  debts  due  to  it. 

Real  estate  to  gy|^  ^o  such  bank  shall  hold  the  title  and  possession  of 
^thto^fivf years,  any  real  estate  conveyed  to  or  purchased  by  it  to  secure 
any  debts  due  to  it  for  a  longer  period  than  five  years, 

Exemption  from  Taxation. 

Tax  exemp-  g^c.  18.  That  every  national  farm-land  bank  incorpo- 
***"^'  rated  under  the  terms  of  this  act  and  the  capital  stock 

and  surplus  therein  and  the  income  derived  therefrom 
and  the  mortgages  and  deeds  of  trust  (and  the  notes  and 
bonds  secured  thereby)  held  by  said  bank  and  the  national 
land-bank  bonds  issued  by  the  same  shall  be  exempt 
from  Federal,  State,  and  local  taxation,  excejit  in  respect 
to  taxes  upon  real  estate. 

Federal  Fiduciary  Agent, 

federal  fidu-  gjjc.  19.  That  the  Commissioner  of  farm-land  banks 
clary  agen  .  gi^^U  at  the  time  of  organization  of  each  national  farm- 
land bank  designate  some  individual  who  is  not  an  officer 
or  (lirector  of  the  bank,  and  who  is  not  objectionable  to  the 
directors  of  the  bank,  as  a  "Federal  fiduciary  agent"  for 
that  bank,  who  shall  also  be  the  representative  of  the 
bureau  of  farm-land  banks.  As  such  Federal  fiduciary 
Powers  and  du-  agent  he  shall  have  the  following  powers  and  perform  the 

following  duties : 

j^.'''^*h'^litionai      First.  He  shall  certify  to  each  national  land-bank  bond 

land-bank  bond*  issucd  by  the  Said  bank,  and  no  national  land-bank  bond 

issued  without  his  signature  shall  be  binding  upon  the  said 

bank. 

secrad  s h_Mi      Sccond.  Heshallhave  joint  possession  and  control  with 

sion^wuh  b'a^ikTf  the  bank  of  the  mortgages  and  deeds  of  tiaist  (and  of  the 

i^SaUonaiTand- n()tes  and  bonds  secured  thereby)  which  are  deposited 

bank  bonds.        j^g  security  for  the  national  land-bank  bonds  issued  by  the 

Nochangcsinorjjank,  and  uo  mortgage  or  deed  of  trust  (or  note  or  bond 

credits  on   mort-  ',,  ,      .       ^    W  i-,i        •     •     i  •  c  \  ■ 

gages  except  with  secured  thereby)  so  ])laced  m  the  joint  possession  oi  nun- 
Snt.'"'"''°self  and  the  said  bank  shall  be  withdrawn  or  changed  or 


\ 


AGRICULTUKAL    CREDIT.  63 

have  any  credit  made  thei-eon  except  by  and  with  liis  con- 
sent in  writing. 

Third.  He  shall  have  the  supervisory  control  of  all  ^Jf^f-    erunS 
entries   in   the   mortgage  ledger   kept   by  the   bank,   in  in    mortgage 
which  ledger  shall  be  kept  a  detailed  statement  of  each  ^®'^""- 
issue  of  national  land-bank  bonds  made  by  the  bank,  leS^'mTjatS 
and  of  all  the  mortgages  or  deeds  of  trust  (and  notes  or  tain. 
bonds  secured  thereby)  held  by  the  bank  and  himself 
jointly,  to  secure  the  national    land-bank  bonds  of  the 
bank,  as  well  as  such  other  mformation  as  may  be  re- 
quired by  the  bureau  of  farm-land  banks.     And  no  entry  ^^^"^l ,  t^^ 

\      TT    T      "^  1       '  1  •!  11  •!•         ■         approval    of    en- 

shall  be  made  in  the  said  mortgage  ledger  indicating  tries  in  writing. 
either  the  deposit  of  mortgages  or  deeds  of  trust,  the  with- 
drawal or  substitution  of  mortgages  or  deeds  of  trust,  or 
credits  on  mortgages  or  deeds  of  trust  so  held  by  the 
bank,  except  by  and  with  his  approval  in  writing,  which 
approval  may  be  si^ified  by  signing  his  name  on  the  gi^ofpagT  ™^' 
margin  of  the  page  in  the  mortgage  ledger  where  such 
entries  are  made. 

Fourth.  He  shall  execute  such  bond  with  such  security  Fourth.  Bond, 
as  may  be  required  by  the  commissioner  of  farm-land 
banks.  The  salary  and  expenses  of  said  Federal  fiduci-  ^^^J  *°*^  ®^" 
ary  agent  shall  be  fixed  by  the  joint  agreement  of  the 
bank  and  of  the  commissioner  of  farm-land  banks  and 
shall  be  paid  by  the  national  farm-land  bank  with  which 
he  is  acting. 

Capital  Stock. 

Sec.  20.  That  the  shares  of  stock  of  each  national  farm-  ^  capita^i  ^  suxk 
land  bank  shall  be  of  the  par  value  of  $100  each,  and  each  power, 
stockholder  shall  be  entitled  to  one  vote  for  each  share  of 
fitock  standing  in  his  name:  Provided,  however,  That  in 
the  case  of  national  farm-land  banks,  cooperative,  each 
stockholder  shall  be  entitled  to  one  vote  and  only  one, 
and  the  shares  of  stock  may  be  of  the  par  value  of  $25 
each.  Shareholders  may  vote  by  proxies  duly  author- 
ized in  writing;  but  no  officer,  clerk,  or  employee  of  such 
bank  shall  act  as  proxy,  and  no  shareholder  whose  liabil- 
ity is  past  due  or  un])aid  shall  be  allowed  to  vote.  Any 
national  farm-land  bank  may,  in  its  by-laws,  authorize 
cumulative  voting  for  directors. 

Sec.  21.  Thatatleastmypercentumofthecapitalstock  ^^Pf^yj°3«t°*^  °° 
of  every  national  farm-land  bank  shall  be  paid  in  before 
it  shall  be  authorized  to  do  business,  and  the  remainder 
of  the  capital  stock  of  said  bank  shall  bo  paid  in,  in  install- 
ments of  at  least  ten  per  centum  each  on  the  whole  amount 
of  the  capital,  as  frequently  as  one  installment  before  the 
end  of  each  succeeding  month  from  the  time  it  shall  be  au- 
thorized by  the  commissioner  of  farm-land  banks  to  com- 
mence business,  and  the  payment  of  each  installment 
shall  be  certified  to  the  commissioner  of  farm-land  baid<s, 
under  oath,  by  the  j)resident  or  cashier  of  the  ])ank. 

Sec.  22.  Tliat  whenever  any  shareholder  or  his  assignee  ^,oo"k-hVidors^ 
fails  to  pay  any  installment  on  the  stock  when  the  same  liability. 


g4  AGRICULTUEAL    CREDIT. 

is  required  by  the  preceding  section  to  be  paid,  the  direc- 
tors of  such  bank  may  soil  the  stock  of  such  delinquent 
shareholder  at  public  auction,  having  given  three  weeks' 
previous  notice  thereof  in  a  newspaper  of  general  circula- 
tion published  in  the  city  or  county  where  the  bank  is 
located  (or  if  no  newspaper  is  published  in  said  city  or 
county,  then  in  a  newspaper  published  nearest  thereto), 
to  any  person  who  will  pay  the  highest  price  therefor,  to 
be  not  less  than  the  amount  due  thereon,  with  the  ex- 
penses of  advertisement  and  sale;  and  the  excess,  if  any, 
shall  be  paid  to  the  delinquent  shareholder.  If  no  bidder 
can  bo  found  who  will  pay  for  such  stock  the  amount  due 
thereon  to  the  association  and  the  cost  of  advertisement 
and  sale,  the  amount  previously  paid  shall  be  forfeited 
to  the  association,  and  such  stock  shall  be  sold  as  the 
directors  may  ord.er,  within  six  months  from  the  time 
of  such  forfeiture;  and  if  not  sold,  it  shall  be  canceled 
and  deducted  from  the  capital  stock  of  the  association. 
If  any  such  cancellation  and  reduction  shall  reduce  the 
capital  of  the  association  below  the  minimum  of  the  cap- 
ital required  by  law,  or  below  one-fifteenth  of  its  outstand- 
ing national  land-bank  bonds,  the  capital  stock  shall, 
within  thirty  days  from  the  date  of  such  cancellation,  be 
increased  to  the  required  amount,  in  default  of  which  a 
receiver  may  be  appointed,  according  to  the  provisions 
of  section  fifty-two  hundred  and  thirty-four  of  the  Re- 
vised Statutes,  so  far  as  it  may  be  applied  hereto,  to  close 
up  the  business  of  such  bank. 

.^^creaseofcap-  g^Q  23.  That  any  bank  formed  under  this  act  may,  by 
its  articles  of  association,  provide  for  an  increase  of  its 
capital  from  time  to  tune,  as  may  be  deemed  expedient, 
subject  to  the  lunitations  of  this  act.  But  the  maximum 
of  such  increase  to  be  provided  in  the  articles  of  associa- 
tion shall  be  approved  by  the  commissioner  of  farm-land 
banks ;  and  no  increase  of  capital  shall  be  vaUd  until  the 
total  amount  of  such  increase  is  paid  in  and  until  notice 
thereof  has  been  transmitted  to  the  commissioner  of  farm- 
land banks,  who  shall  thereupon  issue  to  such  bank  his 
certificate,  specifying  the  amount  of  such  increase  of 
capital  stock,  with  his  approval  thereof,  and  after  it  has 
been  duly  paid  in  it  shall  be  treated  as  part  of  the  capital 
stock  of  such  association. 

ca^rtautock,  "^  ^^^-  ^4.  That  any  bank  formed  under  this  act  may,  by 
the  vote  of  shareholders  owning  two-thirds  of  its  capital 
stock,  or  in  the  case  of  national  farm-land  banks,  coopera- 
tive, by  the  vote  of  two-thirds  of  the  stockholders,  reduce 
its  capital  to  any  sum  not  below  the  amount  requhcd  by 
this  act  to  authorize  the  formation  of  such  a  bank;  but  no 
such  reduction  shall  be  allowed  which  will  reduce  the  capi- 
tal and  surplus  of  the  association  below  one-fifteenth  of  its 
outstanding  national  land-bank  bonds  as  herem  provided; 
nor  shall  any  such  reduction  be  made  until  the  amount  of 
the  proposed  reduction  has  been  reported  to  and  approved 
by  the  commissioner  of  farm  land  banks. 


agricultural  credit.  65 

Board  of  Directors. 

vSec.  25.  That  the  affau's  of  each  bank  shall  be  man-  ^i^^^f "°°  °' 
aged  by  not  less  than  five  nor  more  than  nine  directors. 
Ml  directors  shall  be  elected  by  the  shareholders  at  a 
meeting  to  be  held  at  any  time  before  the  association  is 
authorized  by  the  commissioner  of  farm-land  banks  to 
commence  business,  and  afterwards  at  meetings  to  be 
held  on  any  such  date  in  January  of  each  year  as  is 
specified  therefor  in  the  articles  of  association.  The 
directors  shall  hold  office  for  one  year,  and  until  their 
successors  are  elected  and  qualified. 

Sec.  26.  That  every  director  must,  during  his  whole  diSre''^"°°°^ 
term  of  service,  be  a  citizen  of  the  United  States ;  and  at 
least  three-fourths  of  the  directors  must  reside  in  the 
State  or  Territory  in  which  the  bank  is  located  for  at 
least  one  year  immediately  preceding  then*  election,  and 
must  be  residents  therein  during  their  continuance  in 
office.  Every  director  must  own,  in  his  o^\^l  right,  at 
least  five  shares  of  the  capital  stock  of  the  bank  of  which 
he  is  a  director.  Any  director  who  ceases  to  be  the 
owner  of  five  shares  of  stock,  or  who  becomes  in  any 
other  manner  disqualified,  shall  thereby  vacate  his  place. 

Sec.  27.  That  each  director,  when  appointed  or  fro^direa^rs''''*^ 
elected,  shall  take  an  oath  that  he  "will,  so  far  as  the  duty  • 
devolves  on  him,  diligently  and  honestly  administer  the 
affairs  of  such  bank,  and  will  not  knowingly  violate  or 
willingly  permit  to  be  violated  any  of  the  provisions  of 
this  act,  and  that  he  is  the  owner  in  good  faith,  and  in 
his  own  right,  of  the  number  of  shares  of  stock  required 
by  this  act,  subscribed  for  by  him  or  standing  in  his  name 
on  the  books  of  the  bank,  and  that  the  same  is  not 
hypothecated  or  in  any  way  pledged  as  security  for  any 
loan  or  debt.  Such  oath  subscribed  by  the  director 
making  it,  and  certified  by  the  officer  before  whom  it  is 
taken,  shall  be  immediately  transmitted  to  the  commis- 
sioner of  farm-land  banks,  and  shall  be  fifed  and  pre- 
served in  his  office. 

Sec.  28.  That  any  vacancy  in  the  board  shall  be  filled  eiel"^^  '"^''"' 
by   appointment   by  the  remaining  directors,   and   any 
director  so  appointed  shall  hold  his  place  until  the  next 
election. 

Sec.  29.  That  if,  from  any  cause,  an  election  of  direc-  .vtorrnJ'ciiuon 
tors  is  not  made  at  the  time  appointed,  the  bank  shall  not  is  held  on  the 
for  that  cause  be  dissolved,  but  an  election  may  be  held  P'"°p'''^  ^y- 
on  any  subsequent  day,  thirty  days'  notice  thereof  in  all 
cases  having  been  given  in  a  newspaper  published  in  the 
city,  town,  or  county  in  which  the  bank  is  located ;  and  if 
no  newsj)aper  is  published  in  such  city,  town,  or  county, 
such  notice  shall  be  published  in  a  newspaper  published 
nearest  thereto.     If  the  articles  of  association  do  not  fix 
the  day  on  which  the  election  shall  be  held,  or  if  no  elec- 
tion is  held  on  the  day  fixed,  the  day  for  the  election  shall 
be  designated  by  the  board  of  directors;   or  if  the  direc- 

S.  Doc.  380,  63-2 5 


66  AGRICULTURAL   CREDIT. 

tors  fail  to  fix  the  day,  shareholders  representing  two- 
thirds  of  the  shares  may  do  so,  or  in  the  case  of  national 
farm-land  banks,  cooperative,  two-thirds  of  the  stock- 
holders may  do  so. 

pr^ei^Vnt"  of      ^^^-  ^^-  "^^^^  ^^^  ^^  *^®  directors,  to  be  chosen  by  the 
board.  board,  shall  be  the  president  of  the  board.     One  or  more 

vice-presidents  shall  likewise  be  chosen  by  the  board. 

Liability  of  Stockholders. 

buuv"''o1"^share-      ^^^^  ^^ '  '^^^^  *^^  shareholders  of  every  national  farm- 
hoiders.  land  baiik,  shall  be  held  individually  responsible,  equally 

and  ratably,  and  not  one  for  another,  for  all  contracts, 
debts,  and  engagements  of  such  bank,  to  the  extent  of 
the  amount  of  their  stock  therein,  at  the  j)ar  value  there- 
of, in  addition  to  the  amount  invested  in  such  shares, 
unless,  in  the  case  of  national  farm-land  banks,  coop- 
erative, by  a  two-thirds  vote  of  the  stockholders  a  larger 
liability  shall  be  undertaken. 

t.iE'^f.T'^''VJ^^r      Sec.  32.  That  persons  holding  stock  as  executors,  ad- 
tees,  etc.,  not  per-       ..,,  -^i-  ,=',  -Li,  ,i' 

sonaiiy  liable,  imuistrators,  guardiaus,  or  trustees  shall  not  be  per- 
sonally subject  to  any  Uabihties  as  stockholders;  but  the 
estates  and  funds  in  their  hands  shall  be  hable  in  like 
manner  and  to  the  same  extent  as  the  testator,  intestate, 
ward,  or  person  interested  in  such  trust  funds  would  be 
if  Uving  and  competent  to  act  and  hold  the  stock  in  his 
own  name. 

Conversion  of  Existing  Land-Mortgage  Companies 

AND  OTHER  StATE  INSTITUTIONS  INTO  NATIONAL  FARM- 
LAND Banks. 


ex 


.. xYs t i n g^*and-  ^EC.  33.  That  any  land-mortgage  association  or  cor- 
mortgage  c  o  m  -  poration,  or  any  similar  institution,  including  building 
statelrfsutuuons  and  loan  associations  or  savings  and  loan  associations 
^nd  b^^s  ^^^'^'  lending  exclusively  on  farm  mortgages,  now  incorporated 
under  the  general  or  special  laws  of  any  wState,  may  become 
a  national  farm-land  bank  under  this  act,  under  a  suitable 
name,  upon  complying  with  the  provisions  of  tliis  act;  and 
in  such  case  the  articles  of  association  and  the  organiza- 
tion certificate  may  be  executed  by  a  majority  of  the 
stockholders  of  the  existing  institution,  and  the  certificate 
shall  decilare  that  the  owners  of  two-thirds  of  the  capital 
stock  of  the  old  institution  have  authorized  the  directors 
to  make  such  certificate  and  to  change  and  convert  the 
institution  into  a  national  farm-land  bank.  The  majority 
of  the  directors,  after  executing  the  articles  of  association 
and  organization  certificate,  shall  have  power  to  execute 
all  other  papers  and  to  do  whatever  may  be  required  to 
make  its  organization  perfect  and  complete  as  a  national 
farm-land  bank.  The  directors  of  the  old  company  may 
continue  to  be  the  directors  of  the  national  farm-land  bank 
until  others  are  elected  or  appointed,  in  accordance  with 
the  provisions  of  this  chajiter.  When  the  commissioner  of 
farm-land  banks  has  eriven  to  such  association  a  certificate 


AGRICULTURAL   CREDIT.  67 

under  Ms  hand  and  official  seal  (after  the  provisions  of 
this  bill  have  been  comphed  with),  and  after  it  is  author- 
ized to  commence  the  business  of  farm-land  banking,  the 
bank  shall  have  the  same  powers  and  privileges  and  shall 
be  subject  to  the  same  duties,  responsibilities,  and  rules, 
in  all  respects,  as  are  prescribed  for  other  banks  originally 
organized  as  national  farm-land  banks,  and  shall  be  held 
and  regarded  as  such  a  national  farm-land  bank;  but  no 
such  bank  shall  have  a  less  capital  than  the  amount  pre- 
scribed for  national  farm-land  banks  organized  under  this 
act,  and  no  such  corporation  shall  be  authorized  to  do 
business  as  a  national  farm-land  bank  until  the  amount 
of  its  outstanding  collateral  trust  bonds  is  so  reduced  that 
it  does  not  exceed  fifteen  times  the  capital  and  surplus  of 
the  said  bank,  and  until  it  complies  in  all  other  respects 
with  the  provisions  of  this  act. 

Privileges  Granted  tq  National  Farm-Land  Banks.    Privileges. 

Sec.  34.  That  the  national  land-bank  bonds  of  any  na-  ta^^'boMi^re- 
tional  farm-land  bank  shall  be  available  for  the  following  ceivabie. 
purposes: 

First.  As  security  for  the  deposit  of  postal  savings  ^  i^"'^*^^^^  ^^^^^ 
funds  in  such  national  farm-land  banks  and  all  other  banks  savings  funds. 
authorized  to  receive  such  deposits. 

Second.  As  a  legal  investment  for  time  deposits  of  gaf®*'*'Sfve^tap^ 
national  banking  associations,  as  provided  in  the  Federal  for  time  deposits 
reserve  act,  and  for  the  funds  accumulated  in  savings  banks  tagTssoc^atiom'" 
organized  and  doing  business  in  the  District  of  Columbia. 

Third.  As  a  legal  investment  for  trust  funds  and  es-  Third,  as  a  le- 
tates  under  the  charge  of  or  admmistered  by  any  of  the  ly  unUed^sTates 
courts  of  the  United  States.  a?r/,Ld*s'  ^^'"'" 

Fourth.  As  a  security  for  loans  from  national  banking    Fouith.'  as  se- 
associations  to  national  farm-land  banks  or  to  individuals,  by^nZtionaiba^ 
for  not  exceeding  five  years,  to  an  amount  aggregating  }°jjj^*^^°^^  ^^jj™^ 
not   over   twenty-five   per   centum   of  the   capital   and  under  sec'  20  of 
surplus  or  to  one  third  of  the  time  deposits  of  the  national  ^c^^^^   reserve 
banking  association  making  such  loan.     Such  loans  to  be 
made  and  held  by  the  national  banking  association  mak- 
ing the  same,  as  being  within  the  provisions  of  section  24 
of  the  Federal  reserve  act,  so  as  to  permit  national  banking 
associations  to  lend  to  national  farm-land  banks,  on  their 
obligations  secured-  by  their  national  land-bank  bonds, 
in  ]^ace  of  making  the  loan  directly  on  farm  lands,  as 
provided  for  in  said  section. 

The  foregoing  privileges  (or  such  of  them  as  the  com- 
missioner of  farm-land  banks,  with  the  approval  of  the 
Secretary  of  the  Treasury,  may,  by  general  rules  applica- 
ble to  aU  banks  organized  hereunder,  from  time  to  time 
designate),  shall  apply  to  national  land-bank  bonds  issued 
under  authority  01  this  act,  only  as  and  when  the  following 
conditions  (or  such  of  them  as  the  commissioner  of  farm- 
land banks,  with  the  approval  of  the  Secretary  of  the 
Treasury,  may  from  time  to  time  by  like  general  rules 


68  AGEICULTURAL   CREDIT. 

designate)  are  likewise  put  into  effect  in  any  State  or 
States, 
(a)  That  home-      ((j)  That  laws  decided  to  be  sufficient  by  the  bureau  of 
Ixe'^mpfiSn  "laws  farm-land   banks  have   been   enacted   by  the    State   in 
waived'^LTt^such  which  such  national  farm-land  bank  is  operating,  with- 
inortgages.  drawing,  or  canceling  the  right  to  claim  exemption,  or 

providing  for  the  waiver  of  such  exemption,   whether 
homestead  or  otherwise,  against  the  mortgages  or  deeds 
of    trust    (or    notes    or   bonds   secured    thereby),    held 
as  security  for  the  national   land-bank  bonds  of  such 
national  farm-land  bank:  Provided,   That  if  the  right  to 
waive  such  exemption  is  given,  then  that  all  the  mort- 
gages or  deeds  of  trust  (and  bonds  or  notes  secured  there- 
by)  deposited  as  security  for  such  national  land-bank 
bonds  contain  such  waiver. 
(6)  That  conj      (J)  That  in  the  judgment  of  the  commissioner  of  farm- 
forecfo's'Jrl  ^a"  e  land  banks,  the  State  laws  providing  for  registration  of 
simplified.    ,      \^t^^  titles,  Conveyances,  and  foreclosures  in  any  given 
State  are  such  as  to  give  reasonable  protection  to  the 
holders  of  first  mortgages  and  first  deeds  of  trust  on 
lands  located  within  that  State, 
uonli^*^  land^      ^^^  '^^''^^  ^^^  national  land-bank  bonds  of  all  national 
hank-^onds^  are  farm-land  banks,  which  are  accepted  under  this  law  as 
vest  mints  ^%?r  security  ui  the  various  matters  above  set  out,  shall  be 
state    sav^ings  likgwisc  accepted.  Under  the  State  laws  of  the  State  in 
funds^'andtalur- which  such  national  farm-land  bank  is  operated,  as  a 
the  stat^''^  "^  legal  investment  for  the  funds  of  savmgs  banks  operat- 
ing in  that  State,  and  of  trust  funds  and  estates  held  by 
or  under  the  control  of  the  courts  of  that  State,  and  as 
a  legal  investment  for  the  reserves  of  insurance  com- 
panies incorporated  under  or  operating  under  the  laws 
of  that  State. 

Examinations. 


Appointment  of      c^^c.  35.  That  the  commissioner  of   farm-land  banks, 
examiners.  ^^^^  ^^^  approval  of  the  Secretary  of  the  Treasury,  shall, 

as  often  as  shall  be  deemed  necessary  or  proper,  indicate 
a  suitable  person  or  persons  to  make  an  examination  of 
the  affairs  of  every  national  farm-land  bank,  and  shall 
Powers.  have  power  to  make  a  thorough  examination  into  all  the 

affairs  of  the  bank,  and  in  doing  so  to  exaniino  any  of  the 
officers  and  agents  thereof  on  oath,  and  shall  make  full 
and  detailed  report  of  the  condition  of  the  bank  to  the 
commissioner  of  farm-land  banks.  The  person  assigned 
to  the  making  of  such  examination  of  the  affairs  of  anv 
national  farm-land  bank  shall  have  the  power  to  call 
together  a  quorum  of  the  directors  of  sucn  bank,  who 
sliull,  under  oath,  state  to  such  examiner  the  character 
and  circumstance  of  such  of  its  business  cs  he  may  desig- 
nate. The  expense  of  tlie  examinations  herein  provided 
for  shall  be  assessed  by  the  bureau  of  farm-land  banks 
tioned  ^^  "^  ""^ '  n])<)n  the  banks  examined  in  proportion  to  assets  or  re- 
sources held  by  such  banks  upon  a  date  during  the  year  on 


AGRICULTURAL   CREDIT.  69 

which  such  examinations  are  held,  to  be  established  by 
the  bureau  of  farm-land  banks.  The  provisions  of  sec- 
tion 26  of  the  Federal  reserve  act  prohibiting  the  mak- 
mg  of  any  loan  or  granting  any  gratuity  to  the  exam-  Gratuities  to 
iner  of  a  national  bank  shall  apply  with  equal  force  to  wbiTed!"^^  '^^°' 
examiners  of  national  farm-land  banks,  and  the  penalties 
and  punishments  therein  provided  shall  be  equally 
applicable  to  such  examiners  of  national  farm-land  banks. 

Sec.  36.  That  the  commissioner  of  farm-land  banks  stft^^^;Si^°°  °^ 
shall  requne  statements  showing  the  condition  of  each 
bank  to  be  published  in  a  newspaper  or  newspapers  pub- 
lished in  the  vicmity  where  the  bank  is  located  at  such 
times  as  calls  for  such  statements  may  be  made  by  him, 
and  in  general  conformity  witii  the  practice  as  to  call  for 
statements  from  national  banking  associations  by  the 
Comptroller  of  the  Currency:  Provided,  That  in  the  dis- 
cretion of  the  Secretary  of  the  Treasury,  an}"  or  all  exam- 
inations of  national  farm-land  banks  may  be  made  by 
examiners  who  are  commissioned  to  examine  national 
banking  associations. 

Dividends. 

Sec.  37.  That  the  directors  of  each  national  farm-land  i>ividends. 
bank  shall  be  authorized  to  declare  a  dividend  upon  the 
outstanding  and  paid-up  capital  stock  of  such  an  mstitu- 
tion  out  of  the  net  earnings  of  the  same :  Provided,  That  in 
no  case  shall  any  dividend  be  paid  which  will  impaii-  the  paKpitS.*  '"* 
capital  stock  of  the  said  mstitution,  nor  shall  any  dividend 
be  paid  which  will  reduce  the  amount  of  capital  and  sur- 
plus of  each  bank  to  less  than  one-fifteenth  of  the  out- ^j^,^^-®"^ '■®^*"<^' 
standing  national  land-bank  bonds  of  the  said  bank: 
Provided,  however,  That  in  the  case  of  cooperative  farm- 
land banks  the  net  earnings  of  such  banking  corporations  ^  o'Jfffiull 
available  and  set  aside  for  the  payment  of  interest  and  banks. 
dividends  shall  be  distributed  as  follows:  "To  each 
owner  of  stock  of  such  corporation  may  first  be  paid  a 
dividend  in  the  form  of  interest  upon  the  par  value  of  the 
shares  of  stock  owned  by  such  owner  of  stock,  computed 
at  the  rate  of  interest  generally  prevailing  in  the  com- 
munity where  such  bank  is  located,  but  not  exceeding  How  declared, 
the  legal  rate  of  interest  in  the  State  where  such  bankmg 
corporation  is  situated,  if  said  earnings  are  sufficient  for 
that  purpose ;  otherwise,  to  be  paid  to  each  owner  of  such 
stock  pro  rata  computed  upon  the  par  value  of  such  stock. 
The  balance  of  such  net  earnings,  if  any,  shall  be  distrib- 
uted among  the  patrons  of  such  banking  corporation  in 
proportion  to  the  amount  of  busmcss  transacted  with 
such  bank:  Provided,  however,  That  in  such  distribution 
tho  share-owning  patrons  may,  if  approved  by  a  two- 
thirds  vote,  take  dividends  at  a  rate  twice  as  great  as 
that  paid  to  nonshare-owning  patrons":  Provided  fur- 
ther, That  a  special  reserve  fund  shall  be  maintained  by 
each  national  larm-land  bank,  which  special  reserve  fund 


70  AGRICULTUEAL    CREDIT. 

shall  be  created  out  of  the  net  earnings  of  the  bank  and 
shall  at  all  tunes  be  equal  to  five  per  centum  of  the  total 
annual  interest  charge  on  the  land-bank  bonds  which  are 
outstandmg  against  such  bank  at  the  close  of  the  last 
fiscal  year.  Such  special  reserve  fund  shall  not  be  dis- 
bursed for  any  other  purpose  except  to  meet  arrears  in 
interest  payment  on  land-bank  bonds  issued  by  such 
bank. 

Directors'  Meetings. 

m^et^onc'I  S  ^^^-  ^^-  "^^^^  ^^^  dircctors  of  each  national  farm-land 
month.  bank  shall  meet  at  least  once  in  each  month,  and  at  such 

other  times  as  are  necessary.  They  shall  have  power  to 
committe^^and  appoint  Committees  and  to  delegate  to  such  committees 
delegate  powers,  such  portion  of  their  powers  as  may  be  necessary  for  the 

convenient  operation  of  the  bank,  subject  to  the  approval 

of  the  bureau  of  farm-land  banks. 

Appraisement  Committee. 

commutee™*"'*      ^Ec.  39.  That  the  board  of  directors  of  each  national 

farm-land  bank   shall    immediately  upon   its   organiza- 

when  appoint-  tion,  and  bcfore  making  any  loans  upon  farm  lands, 

appoint  an  appraisement  committee,  which  shall  be  com- 

composed     of  poscd  of  three  members  of  the  board  of  directors.     The 

^^mes"^  filed  namcs  of  said  appraisement  committee  shall  be  at  once 

^'j|^^^°f™^|j[  delivered  to  the  commissioner  of  farm-land  banks,  and 

banks.  any  change  in  the  said  committee  shall  be  at  once  com- 

Duties.  municated  to  him.     The  duty  of  said  committee  shall  be 

to  appraise,  or  cause  to  be  appraised,  and  report  on  the 

value  of  real  estate  offered  as  security  for  loans.     All 

ports'^'**^^  '®*  reports  of  the  appraisement  committee  shall  be  made  in 
writing,  signed  by  a  majority  of  the  committee,  and  shall 
give  a  description  of  the  property,  the  value  at  which  it 
is  appraised  by  them,  the  value  at  which  it  is  assessed 
for  taxation,  and  such  other  information  as  may  be 
recjuired  by  the  directors  of  the  bank  or  by  the  com- 

jjj^^P"'''^  *"  ^  missioner  of  farm-land  banks.  Such  report  shall  be  filed 
and  preserved  with  other  papers  relating  to  such  loan, 

ou?°wmteir're-  ^^^^^  ^^^  ^^^^  shall  be  made  on  any  farm  land  imless  and 

port.  until  such  report  in  writing  has  been  filed  with  the  said 

bank. 

Postal  Savings  Deposits — Deposit  of  State  Funds — 
Reserves — Loan  of  Current  Deposits. 

t.^'ror.'Iill^ni.ft^'i      Sec.  40.   That    all    national   farm-land    banks    shall, 

to  receive  postal  ,  r     t       ^  -i       i>  i»i  i 

savings  deposits,  upon  the  rcqucst  of  the  board  of  trustees  of  the  postal 
savings  system,  receive  deposits  of  postal  savings  funds 
to  the  extent  of  one-half  their  capital  and  surplus,  and 
pay  interest  thereon  at  the  rale  required  to  be  paid  by 
other  banks  on  similar  postal  deposits. 


I 


AGRICULTURAL   CREDIT.  71 

Sec.  41.  That   the  limitation  on   the  amount  of  de- ^j^^it^'^r  Ve" 

Eosits  which  shall  be    received  by  national  farm-land  posits  does  n  o  t 
anks,  by  which  they  are  prevented  from  receiving  de-  sa^mgs^r^Gov- 
posits  in  excess  of  fifty  per  centum  of  their  capital  and  ^ep^slte*  °^  ^^^ 
surplus,  shall  not  apply  to  deposits  made  with  said  banks 
by  the  Government  in  the  shape  of  postal  savings  de- 
posits,   or    other    governmental    deposits;    nor    shall    it 
prevent  the  said  banks  from  receivmg  deposits  of  State 
funds.     On  all  time  deposits  of  whatever  character,  the  ^^^^^^^^fj^^  ^|^ 
national  farm-land  banks  shall  maintain  a  cash  reserve  posits;  isner cent 
of  at  least  five  per  centum;  and  on  all  check  deposits  shall  *'°*'^®*''^  eposits. 
maintain  a  reserve  of  at  least  twelve  per  centum,  either  in 
cash  or  in  balances  with  other  banks,  under  rules  and 
regulations  to  be  prescribed  by  the  commissioner  of  farm- 
land banks.     The  postal  savings  deposits  held  by  any    p^|[^^  sav^^gs 
such  bank,  except  the  five  per  centum  reserve,  may  be  in-  in  national  land- 
vested  only  in  first  mortgage  or  first  deed  of  trust  loans  ^^^  ''°"^^' 
on  farm  land,  being  secured  to  the  Government  by  the 
deposit  with  it  of  the  national  land-bank  bonds  of  any 
national  farm-land  bank  complying  with  the  rules  of  the 
commissioner    of    farm-land    banks,    approved    by    the 
Secretary  of  the  Treasury,  as  prescribed  in  pursuance  of 
the  provisions  of  this  act.    The  funds  held  on  deposit  by 
such  banks  for  the  State  in  which  they  operate  may  be  how*i^v|^ted*^~ 
invested  as  provided  by  the  laws  of  such  State. 

Destkuotible  Property  to  be  Insured. 

Sec.    42.  That   wherever    the    value    of   buildings    or^^®^*^'""!*'^'® 

1  .11  11  111'  i»  property  to  be  in- 

destructible  property  attached  to  the  land  is  a  part  oi  sured. 
the  security  for  any  loan,  such  buildings  or  destructible 
property  shall  be  properly  insured  against  loss  by  fire, 
and  policies  representing  such  insurance  shall  be  prop- 
erly assigned  and  deposited  along  with  the  mortgages 
under  the  joint  control  of  the  said  bank  and  the  Federal 
fiduciary  agent.     In  such  case  provisions  shall  be  made 
in    the    mortgages    or    deeds    of    trust    for    the    pay-  pre^T^s*  pt<^ 
ment  by  the  borrower  of  an  amount  sufficient  to  pay  vided  for. 
the  premiums  on  such  insurance  pohcies,  in  addition  to 
the  interest,    amortization,   and   administration  charges 
to  be  paid   by  him   as  herein  set  out.     In   appraising 
property  for  loans,  the  buildings  and  destructible  prop- 
erty shall  not  be  valued  at  more  than  twenty  per  centum 
of  the  total  appraisement. 

Branch  Banks. 

Sec.  43.  That  no  national   farm-land   bank  shall  be  „„?™«*„^^*»''" 
authorized  to  operate   branches,   but  each  said  mstitu- 
tion   may,   with   the   approval   of   the   commissioner   of 
farm-land    banks,   employ  and    maintain  loan   agencies 
throughout  the  State  in  wliich  it  is  operated. 


72  agmcultueal  ceedit. 

Sales  Agencies. 

Sales  agencies.  g^c^  44^  That  any  national  farm-land  bank  may,  with 
the  consent  of  the  commissioner  of  farm-land  banks, 
maintain  either  within  the  State  in  which  it  is  oper- 
state.*^^^^  '^^ating,  or  elsewhere,  sales  agents  or  agencies  for  the  sale 
of  its  national  land-bank  bonds  or  for  tradmg  in  the 
same. 

How    Periodic    Payments    Made    by   Borrower    on 
Mortgage  to  be  Determined. 

er?'tateres*t'7aTe      ^^^-  ^^'  "^^^^  to  the  rate  of  interest  to  be  borne  by 

fixed  in  such  case,  the  national  land-bank  bonds  to  be  issued  by  the  bank 

shall  be  added  the  administration  charge,  together  with  a 

charge  sufficient  to  amortize  the  loan  by  the  time  of  its 

maturity,  and  in  tliis  way  the  periodic  payment  to  be 

Periodic   pay-  paid  by  the  borrower  on  his  mortgage  shall  be  fixed,  and 

ments  not  to  03  J ,  .        ,  «^  ,,    -  .  o    &  1      1      n  1 

changed.    •         this  sliall  DC  sct  out  in  evcry  mortgage  and  siiail  not  be 
changed  during  the  term  thereof. 


Loans  May  be  Paid  with  National  Land-Ban k  Bonds 
OF  Same  Series — Bank  May  Buy  in  its  National 
Land- Bank  Bonds  and  Have  Corresponding 
Amount  of  Mortgages  Released. 

mS'^lyoflliir/t-      ^^^-  ^^'  That  any  borrower  shall  be  entitled  to  pay  off 
gage.  the  amount  of  his  mortgage  or  any  portion  thereof  by 

presenting  to  the  bank,  on  any  interest  period  after  the 
first  five  years,  the  national  land-bank  bonds  of  the  bank 
of  the  same  series  as  those  issued  against  his  mortgage. 
To  the  extent  of  such  national  land-bank  bonds  pre- 
sented and  canceled  at  such  time,  the  borrower  shall  be 
relieved  of  his  mortgage  indebtedness  and  proper  credits 
shall  be  made  upon  his  mortgage.     The  Federal  fiduciary 
and'^'^ca^c^eT  ^?tl  ^g^ut  shall  evidence  such  credit.     The  bank  issuing  such 
bonds  and  release  national  land-bank  bonds  shall  also  have  the  ri<^ht  at  anv 
mortgages.  time  to  buy  in  the  open  market  its  national  land-bank 

bonds  and  to  cancel  the  same,  and  thereupon  to  release 
a  proportionate  amount  of  the  mortgages  securing  such 
par'^for^fonds  national  land-bank  bonds.     But  in  case  any  of  such  na- 
caiied   for  pay-  tional  land-bank  bonds  of  the  bank  are  called  for  pay- 
™''"^"  ment  by  the  bank,  as  hereinbefore  provided,  then  the 

same  must  be  paid  off  by  the  bank  at  par. 
iien"when*'^TJIn      ^^^-  ^^-  That  whenever  the  borrower  pays  his  debt  in 
paid.  full  tlie  bank  shall  promptly  satisfy  and  discharge  the 

lien  of  record. 

General  Powers  Given  to  Commissioner  of  Farm- 
Land  Banks. 

given"to''comr'1s-      ^^^-  ^^^  That  the  commissioncr  of  farm-land  banks,  by 

sioner   of  farm-  general  rulcs  and  regulations,  shall  prescribe  the  metliods 

anks.        ^£  keeping  the  mortgage  register;   of  holding  and  pre- 


AGRICULTURAL    CREDIT.  73 

serving  the  mortgages  and  the  bonds  secured  by  deed  of 
trust  in  the  joint  possession  of  the  bank  and  of  the  Fed- 
eral fiduciary  agent;  of  crediting  payments  on  mortgages; 
of  canceUng  mortgages;  and  of  releasing  the  liens  of  mort- 
gages in  whole  or  in  part;  and  the  general  rules  and  ref- 
lations for  the  conduct  of  the  institutions  provided  for 
under  this  act.  Such  rules  and  regulations,  not  in  con- 
flict ^^'ith  the  provisions  of  this  act,  shall  be  binding  upon 
all  the  banks  created  under  the  same. 

Sec.  49.  That  all  matters  relating  to  the  organization 
and  operation  of  said  national  farm-land  banks  created 
under  this  act  shall  be  under  the  direction  and  control  of 
the  commissioner  of  farm-land  banks,  except  as  herein 
specified. 

Penalties  for  Violation  of  Law. 

Sec.  50.  That  any  officer,  clerk,  or  agent  of  any  national  sec^f^^'^^^Vand 
farm-land  bank  or  any  Federal  fiduciary  agent  herein  5209,  etc. 
described,  who  commits  any  offense  or  malfeasance,  such 
as  described  in  sections  fifty-two  hundred  and  eight  and 
fifty-two  hundred  and  nine  of  the  Revised  Statutes  of  the 
United  States,  and  section  thirteen  of  the  act  approved 
July  twelfth,  eighteen  hundred  and  eighty-two,  bemg  the 
law  relating  to  national  banks,  shall  be  punished  upon  con- 
viction as  prescribed  in  the  said  laws  relating  to  national 
banks. 

Sec.  51,  That  all  acts  and  parts  of  acts  inconsistent 
herewith  are  hereby  repealed. 


Part  III. 


PERSONAL  OR  SHORT-TERM  CREDIT. 


LETTER  OF  TRAISTSMITTAL. 


UNITED  STATES  COMMISSION  TO  INVESTIGATE  AND  STUDY  IN  EURO- 
PEAN COUNTRIES  COOPERATIVE  LAND-MORTGAGE  BANKS,  COOPERA- 
TIVE RURAL  CREDIT  UNIONS,  AND  SIMILAR  ORGANIZATIONS  AND 
INSTITUTIONS  DEVOTING  THEIR  ATTENTION  TO  THE  PROMOTION  OF 
AGRICULTURE   AND   THE    BETTERMENT  OF   RURAL   CONDITIONS." 

Washington,  D.  C,  March  IS,  1914. 
To  the  Senate  and  the  House  of  Representatives: 

We  have  the  honor  to  submit  herewith  Part  III  of  the  report  of 
the  United  States  commission,  appointed  by  the  President  and  au- 
thorized by  an  act  approved  March  4,  1913,  to  investigate  and  study 
in  Europran  countnes  cooperative  land-mortgage  banSs,  cooperative 
rural  credit  unions,  and  similar  organizations  and  institutions  devot- 
ing their  attention  to  the  promotion  of  agriculture  and  the  better- 
ment of  rural  conditions"  and  "to  submit  a  report  to  Congress  as 
early  as  practicable  embodying  the  results  of  its  investigations  and 
such  recommendations  as  it  may  see  fit  to  make." 

Parts  I  and  II,  relating  to  land-mortgage  or  long-term  credit,  were 
submitted  to  Congress  on  January  29,  1914,  and  printed  as  Senate 
document  No.  380,  Parts  I  and  11,  Sixty-third  Congress. 
Part  III  relates  to  personal  or  short-term  credit. 
Respectfully, 

Duncan  U,  Fletcher,  Chairman. 

Ralph  W,  Moss,  Vice  Chairman. 

Thomas  P.  Gore. 

Harvie  Jordan. 

John  Lee  Coulter,  Secretary. 

Ejenton  L.  Butterfield. 

Clarence  J.  Owens. 


OOlSTTEl^TS. 


Part  TIT. 

Page. 

Introduction 9 

People's  banks 11 

Number  of  banks  and  membership 11 

Share  capital 13 

Liability 14 

Working  capital 15 

Loans  and  investments 17 

Profits  and  losses 20 

Central  banks  and  federations 22 

Summary 22 

Raiffeisen  societies  or  rural  credit  unions 22 

Number  of  banks,  members,  etc 23 

Entrance  fees  and  share  c?  ]  i ' ;.l 24 

Liability 25 

Working  capital 25 

Loans  and  investments 27 

Profits  and  losses 28 

Central  banks  and  federations 29 

Summary 29 

Concluflions  and  recommendations 30 

5 


Part  III. 


PERSONAL  OR  SHORT-TERM  CREDIT. 


AGRICULTURAL  CREDIT. 


PART  in. 

PERSONAL  OR  SHORT-TERM  CREDIT. 

Washington,  D.  C.,  March  13,  19U. 
To  the  Congress: 

The  last  paragraph  of  the  act  making  appropriations  for  the 
Department  of  Agriculture  for  the  fiscal  year  ending  June  30,  1914, 
approved  March  4,  1913,  authorized  the  creation  of  the  United  States 
Commission  and  defined  its  duties  as  follows: 

That  the  President  of  the  United  States  shall  appoint  a  commission  composed 
of  not  more  than  seven  persons,  who  shall  serve  vpithout  compensation,  to 
cooperate  with  the  American  Commission  assembled  under  the  auspices  of  the 
Southern  Commercial  Congress  to  investigate  and  study  in  European  countries 
cooperative  land-mortgage  banks,  cooperative  rural-credit  unions,  and  similar 
organizations  and  institutions  devoting  their  attention  to  the  promotion  of 
agriculture  and  the  betterment  of  rural  conditions;  and  for  the  purpose  of  its 
investigations  the  commission  shall  be  authorized  to  incur  and  have  paid,  upon 
the  certificate  of  its  chairman,  such  expenses  in  the  city  of  Washington  and 
elsewhere  for  the  payment  of  the  salaries  of  employees,  clerks,  stenographers, 
assistants,  and  such  other  necessary  expenses  as  the  commission  may  deem 
necessary :  Provided,  That  the  total  expenses  incurred  for  all  purposes  shall 
not  exceed  the  sum  of  $25,000 ;  and  the  said  commission  shall  submit  a  report 
to  Congress  as  early  as  practicable  embodying  the  results  of  its  investigations 
and  such  recommendations  as  it  may  see  fit  to  make. 

In  pursuance  of  the  authority  conferred  on  him  by  this  act.  Presi- 
dent Wilson  named  as  the  members  of  this  commission : 

United  States  Senator  Duncan  U.  Fletcher,  of  Florida. 

United  States  Senator  Thomas  P.  Gore,  of  Oklahoma. 

Congressman  Ralph  W.  Moss,  of  the  fifth  district  of  Indiana. 

Col.  Harvie  Jordan,  planter,  of  Atlanta,  Ga. 

Dr.  John  Lee  Coulter,  agricultural  expert  of  the  Census  Bureau.  Washington, 
D.  C. 

Dr.  Kenyon  L.  Butterfield,  president  of  the  Massachusetts  Agricultural  Col- 
lege, Amherst,  Mass. 

Dr.  Clarence  J.  Owens,  managing  director  of  the  Southern  Commercial  Con- 
gress, Washington,  D.  O. 

The  members  perfected  an  organization  with  Senator  Duncan  U. 
Fletcher  as  chairman  and  Congressman  Ralph  W.  Moss  to  act  as 
chairman  in  his  absence,  and  with  Dr.  John  Lee  Coulter  as  secretary. 

On  January  29,  1914,  your  commission  made  its  report  pertaining 
to  long-term  or  land-mortgage  credit.  This  report  pertains  to  per- 
sonal or  short-term  credit. 

From  all  information  that  the  commission  has  assembled  on  the 
status  of  personal  or  short-time  credit  for  farmers  in  the  United 
States  it  is  clear  that  very  different  conditions  exist  in  different 


10  AGBICULTURAL   CEEDIT. 

parts  of  the  country.  In  some  it  is  perfectly  clear  that  farmers 
have  most  of  the  institutions  necessary,  so  far  as  personal  or  short- 
time  credit  is  concerned.  In  all  parts  of  the  country  farmers 
patroniise  to  a  greater  or  less  extent  small  and  mediiun  national 
banks,  small  and  medium  State  banks,  as  well  as  private  banks. 
To  a  considerably  smaller  extent  they  patronize  and  are  served  by 
loan  and  trust  companies  and  savings  banks,  both  mutual  and  stock. 
Some  other  institutions  of  less  importance  are  to  be  found. 

In  addition  to  these  regularly  established  and  recognized  financial 
institutions,  farmers  are  also  served  extensively  or  patronize  exten- 
sively individual  lenders.  Farmers  both  borrow  and  lend  as  individ- 
uals to  individuals,  and  also  borrow  fi'om  individuals  other  than 
farmers  to  a  considerable  extent,  and  possibly  lend  in  some  cases. 
Then,  too,  farmers  depend  upon  the  local  stores  and  representatives 
of  commission  houses  and  other  buyers  of  farm  products  and  dealers 
in  farm  supplies  for  credit  to  a  very  large  extent. 

There  are  no  data  available  to  show  how  many  farmers  patronize 
the  different  institutions  and  agencies  noted  above,  nor  are  data  avail- 
able to  show  to  what  extent  they  patronize  these  institutions.  It  is 
possible,  however,  to  show  the  number  of  each  type  of  institution  in- 
dicated above,  and  it  is  also  possible  to  show  the  number  of  persons 
who  cater  to  farmers. 

In  the  reports  of  the  Comptroller  of  the  Currency  will  be  found 
statistics  showing  the  number  and  location  of  national  banks.  State 
banks,  private  banks,  loan  and  trust  companies,  mutual  savings 
banks,  and  stock  savings  banks.  The  same  reports  show  the  extent 
to  which  these  institutions  lend  with  real  property  as  security  and 
also  the  extent  to  which  commercial  paper  is  backed  by  collateral 
or  is  "  one-name  "  or  "  two-name  "  paper.  They  also  show  the  extent 
to  which  this  is  "  demand  "  or  "  time  "  paper. 

The  "  occupation  "  statistics,  published  by  the  Bureau  of  the  Cen- 
sus, Department  of  Conmierce,  show  the  number  of  real-estate  agents, 
bankers,  storekeepers,  etc.  It  is  not  essential,  however,  in  a  brief 
report,  to  go  into  all  of  these  details,  although  they  should  all  be  kept 
in  mind  in  any  movement  to  secure  new  legislation. 

One  of  the  first  very  definite  and  fundamental  observations  which 
must  be  accepted  as  a  result  of  an  examination  into  the  characteris- 
tics of  financial  institutions  in  this  country  which  serve  farmers  so 
far  as  credit  is  concerned  is  that  they  were  not  cotistructed  to  serve 
the  special  needs  of  the  farmers.  Because  the  financial  institutions 
have  not  been  constructed  to  serve  the  special  needs  of  the  farmers, 
other  institutions,  such  as  stores  of  all  kinds  and  persons  who  are 
the  purchasers  of  and  dealers  in  farm  products,  have  often  been 
forced  to  furnish  the  financial  aid  necessary. 

An  illustration  of  the  peculiar  difficulties  of  short-term  credit  is 
given  by  J.  R.  CahiU,  Esq.,  in  a  recent  report  (Agricultural  Credit 
and  Cooperation  in  Grermany,  S.  Doc.  No.  17,  63d  Cong.).  He 
states,  on  page  17: 

For  the  provision  of  this  form  of  credit  in  adequate  amount  and  on  suitable 
conditions  as  to  interest  and  repayment,  farmers,  especially  medium  and  small 
farmers,  require  a  different  credit  organization  from  that  which  has  been 
evolved  for  merchants  and  manufacturers;  and  for  certain  rather  obvious  rea- 
sons. The  outstanding  feature  of  the  agricultural  industry  is  the  length  of 
period  of  production.  Within  limits  the  manufacturer  can  hasten  at  will  the 
process  of  production,  and  repeat  his  products,  or  the  trader  can  restock  his 


AGBICULTUBAL   CEEDIT.  11 

store  several  times  within  the  year;  for  the  farmer  the  time  of  beginning  and 
the  time  of  finishing  production  are  fixed  by  nature.  Although  the  duration 
of  the  period  of  production  may  be  shortened  to  some  extent,  artificial  hastening 
processes  are  not  applicable  in  most  cases,  and  lack  the  effectiveuess  of  the 
machine  in  industry.  In  certain  important  branches  of  agriculture  the  period 
of  production  may  extend  over  several  years:  Thus  a  foal  requires  three  or 
four  years,  and  a  calf  two  or  three  years  before  becoming  utilizabl'e  or  market- 
able. And  the  returns  of  agricultural  production  are  more  uncertain  than  those 
of  commerce  and  industry  owiug  to  accidents  of  harvest,  risk  of  disease, 
perishability  of  produce,  and  other  causes.  Another  peculiarity — making  due 
allowance  for  depressions  and  for  numerous  seasonal  trades  outside  agricul- 
ture— is  the  irregularity  of  monetary  returns  from  year  to  year,  or  their 
tendency  to  fall  in  certain  months  or  periods  in  each  year.  Unless  his  farming 
is  mixed  [diversified]  the  farmer  obtains  his  main  receipts  in  autumn  when  he 
sells  his  crops  [or  other  farm  products,  such  as  beef  animals,  wool,  etc.].  Under 
these  circumstances  a  banking  system  which  aims  at  a  rapid  turnover  of 
funds  and  grants  credits  of  three  and  four  months,  with  one  or  two  renewals 
for  like  periods,  is  of  very  little  advantage. 

These  special  circumstances  of  agricultural  production  have  been 
carefully  studied  by  the  commission. 

PEOPLE'S  BANKS. 

Most  European  countries  have  recognized  the  different  needs  of  the 
different  classes  of  people,  such  as  merchants,  manufacturers,  farm- 
ers, etc.,  and  different  institutions  exist  to  serve  the  different  classes; 
and  yet  it  is  true  that  in  several  countries  there  is  one  type  of  insti- 
tution which  to  a  very  large  extent  serves  the  different  classes,  thus 
demonstrating  that  it  is  not  absolutely  essential  that  separate  and 
distinct  institutions  exist. 

It  is  not  necessary  to  review  here  the  different  general  financial 
institutions  in  European  countries;  this  has  been  done  by  the  Mone- 
tary Commission.  But  it  is  necessary  to  review  certain  special  ■ 
institutions  which  serve  agriculture  to  a  very  large  extent  in  addi- 
tion to  their  other  financial  activities.  The  most  important  type 
of  institution  of  this  class  is  that  popularly  known  as  the  "  People's 
Bank."  The  best  illustrations  are  found  in  Germany,  Austria,  and 
Italy,  but  some  other  countries  have  institutions  quite  similar  in 
many  if  not  most  respects. 

This  particular  institution  developed  in  Germany,  where  it  is 
popularly  known  as  the  "  Schulze-Delitzsch "  type  of  bank.  It  is 
described  here  first  because  it  resembles  in  many  respects  the  small 
private,  state,  and  national  banks  found  in  many  parts  of  the  United 
States.  It  is  quite  probable  that  slight  changes  in  our  national 
banking  laws  would  make  it  possible  for  the  small  banks  of  this 
country  to  extend  their  activities  so  that  they  might  ser\e  the  same 
purpose  in  the  same  way  that  these  banks  now  serve  the  farmers  of 
Germany,  Austria,  Italy,  and  other  European  countries. 

KUMBER  OF  BANKS  AND  MEMBERSHIP. 

According  to  the  latest  report  available  (statistics  of  1911)  there 
were  in  Germany  1,051  of  these  banks  which  furnished  details  of 
their  operations,  which  is  about  one-seventh  of  the  number  of  na- 
tional banks  in  the  United  States.  The  first  important  character- 
istic is  the  fact  that  the  average  membership  of  these  German  banks 
in  1911  was  639.    This  is  doubtless  many  times  the  number  of  mem- 


12  AGRICULTURAT,   CREDIT. 

bers  or  owners  of  stock  in  the  average  national,  state,  or  private  bank 
in  the  United  States.  This  is  one  of  the  reasons  why  these  institu- 
tions are  called  "  popular  banks."  An  analysis  of  the  type  of  mem- 
bership shows  the  following : 

Per  cent. 
L   Independent  agriculturists   (farmers,  etc) 26.61 

2.  Wage-earning  agriculturists  (laborers,  etc.) 2.42 

3.  Artisans 22.  80 

4.  Merchants,  manufacturers,  etc 19.  (X) 

5.  Workmen,  apprentices,  and  wage-earners  generally 11.  30 

6.  Professional  men,  civil  servants,  clerks,  etc 9.  09 

7.  Persons  living  on  pensions  or  possessing  independent  means 8.  78 

100.00 

From  this  little  table  it  will  be  seen  that  26.61  per  cent  of  all  mem- 
bers are  independent  farmers,  and  an  additional  2.42  per  cent  repre- 
sents farm  laborers.    This  is  the  largest  individual  class  of  members. 

In  Austria  this  type  of  bank  has  grown  very  rapidly  and  the 
number .  far  exceeds  the  number  in  Germany,  where  they  developed 
first.  In  1912  there  were  in  Austria  3,599  of  these  institutions.  Com- 
plete details  for  1910  were  secured  from  2,8G2  of  these  banks,  and 
they  reported  a  membership  of  1,704,090,  which  is  an  average  of  595 
members  per  bank. 

It  will  be  seen  that  in  this  respect  the  Schulze-Delitzsch  banks  of 
Austria  are  very  similar  to  those  of  Germany.  It  is  not  necessary 
to  speak  at  length  of  these  popular  banks  of  Austria,  however,  since 
they  are  only  of  minor  importance  so  far  as  agriculture  is  concerned. 

A  new  type  of  bank  started  in  Austria  (see  description  on  p.  86), 
and  after  this  the  Schulze-Delitzsch  banks  gave  very  little  attention 
to  the  needs  of  the  farmers,  but  even  up  to  now  the  Schulze-Delitzsch 
banks  make  loans  for  fairly  large  amounts  tc  farmers  known  to  be 
of  good  financial  standing.  Small  loans  are  exclusively  handled  by 
the  new  type  of  bank  to  be  described  below.  Only  in  Bohemia, 
Moravia,  and  Galicia  are  the  Schulze-Delitzsch  banks  at  all  numer- 
ous among  the  farmers  and  serve  to  supply  their  needs.  In  this 
respect  these  banks,  except  in  their  general  organization,  serve  the 
farmers  just  the  same  as  small  state,  national,  and  private  banks  in 
rural  districts. 

In  Italy  the  people's  banks  are  called  "  Luzzatti  banks,"  after  the 
leader  who  adapted  the  Schulze-Delitzsch  banks  to  Italian  needs. 
They  are  almost  identical  in  general  organization  with  the  Schulze- 
Delitzsch  banks  of  Germany  and  of  Austria.  In  1908  the  latest 
complete  statistics  available,  there  were  690  of  these  institutions 
in  Italy,  with  a  membership  of  501,022,  showing  an  average  of  726 
per  bank,  which  again  shows  how  similar  this  institution  is  to  those 
found  in  the  countries  above  referred  to. 

In  Italy,  as  in  Germany  and  Austria,  the  people's  banks  preceded 
the  strictly  rural  banks,  and  in  Italy,  as  in  Germany  and  Austria, 
for  a  long  period  they  served  the  farmers  very  considerably;  but  as 
in  these  two  other  countries  so  in  Italy,  they  gave  way  to  a  new  type 
of  bank  adapted  particularly  to  the  needs  of  the  farmers.  It  should 
be  noted,  however,  that  just  as  they  continue  in  Germany  to  have  a 
large  number  of  farmer  members,  so  in  Italy  the  same  general  condi- 
tion prevails.  The  larger  number  of  members  of  people's  banks  in 
Italy  belongs  to  the  lower  middle  class;  23  per  cent  are  artisans  or 


AGRICULTURAL    CREDIT.  13 

small  shopkeepers,  22  per  cent  small  farmers,  and  17  per  cent 
clerks  and  professional  men,  leaving  a  comparatively  small  propor- 
tion for  other  classes  of  members. 

It  will  not  be  necessary  to  refer  to  similar  institutions  in  other  coun- 
tries in  order  to  bring  out  this  fundamental  fact,  that  these  European 
countries  did  not  have  small  banks  to  serve  the  general  needs  oi  the 
great  mass  of  the  middle  classes.  In  this  countiy  we  have  small 
national  banks.  State  banks,  and  private  banks.  In  European  countries 
a  type  of  institution,  with  a  more  diffused  membership,  developed 
to  serve  the  needs  of  farmers.  These  institutions,  some  of  which 
have  been  briefly  referred  to  above,  are  made  more  popular  for  farm- 
ers' than  banks  in  this  country,  but  they  do  about  the  same  kinds  of 
business.  It  is  very  probable  that  the  banks  of  this  country  serve  the 
farmers  approximately  to  the  same  extent  that  these  people's  banks 
do  in  European  countries.  Inasmuch  as  they  seem  to  fill  the  same 
general  position  in  the  national  economy  as  those  in  the  rural  sections 
of  this  country,  it  seems  desirable  to  give  a  brief  further  account  of 
their  general  characteristics  and  form  of  organization. 

SHARE  CAPITAL. 

The  people's  banks  in  different  European  countries  secure  their 
first  capital  by  the  issuing  of  shares;  these  shares  are  owned  by  the 
members.  In  the  different  countries  visited  the  general  impression 
was  that  the  value  of  the  shares  was  rather  high.  In  740  of  these 
banks  in  Germany,  which  are  affiliated  with  the  National  Federation, 
the  shares  are  of  a  nominal  value  of  approximately  300  marks,  or  $71. 

It  is  not  necessary  that  the  shares  be  paid  for  in  one  sum,  however, 
the  general  arrangement  being  that  members  may  pay  for  them  iit 
monthly  installments.  Toward  payment  for  the  share  or  shares 
subscribed  by  a  member  are  placed,  in  addition  to  the  monthly  in- 
stallment, any  dividend  which  becomes  due  to  him  on  a  division  of 
the  profits.  Only  when  the  share  is  fully  paid  up  does  he  receive  such 
dividend  in  cash.  The  prospect  of  receiving  dividends  in  cash  in- 
cites the  members  to  make  every  effort  to  complete  their  payment  in 
the  least  possible  time  and  thus  become  the  actual  owners  of  capital, 
even  though  it  be  on  a  modest  scale. 

The  average  paid-up  capital  per  member  naturally  differs  from  the 
value  of  a  share,  inasmuch  as  not  infrequently  a  member  has  paid  up 
only  part  of  the  value  of  a  share,  while  others  have  in  their  possession 
two  or  more  shares.  If  we  regard  only  the  banks  affiliated  with  the 
National  Federation  in  Germany,  we  find  that  in  1882  the  average 
paid-up  capital  was  223  marks  ($53),  increasing  successively  to  226 
marks  ($54)  in  1892,  276  marks  ($65)  in  1902,  and  364  marts  ($87) 
in  1911.  Some  of  these  banks  not  attached  to  the  National  Federa- 
tion have  a  slightly  higher  average  paid-up  capital  per  member,  the 
result  being  that  the  average  for  all  banks  of  this  type  in  Germany 
in  1911  was  368  marks  ($88). 

This  total  average  paid-up  capital  per  member  is  a  further  illus- 
tration of  the  popular  characteristic  of  the  banks.  There  a'c  large 
numbers  of  members,  and  the  banks  are  interested  principally  in 
the  welfare  of  their  own  people.  But  with  this  large  membership 
the  total  amount  of  share  capital  per  institution  is  comparatively 


14  AGBICULTURAL    CREDIT. 

large,  the  average  for  Germany  being  235,294  marks   ($56,000)   in 
1911. 

It  will  be  noted  from  the  above  that  the  tendency  is  for  the  average 
paid-up  capital  per  member  to  increase,  there  being  an  increase  of 
more  than  50  per  cent  in  the  last  30  3'ears.  There  is  also  the  same 
tendency  "with  reference  to  tlie  average  value  of  individual  shares  of 
^x)ck-  The  General  Congress  of  Popular  Banks  held  at  Wiesbaden 
in  1896  recommended  that  the  shares  should  be  at  least  300  marks 
($71),  while  a  subsequent  congress  recommended  that  in  all  cases 
where  the  banks  were  based  upon  the  limited-liability  principle  the 
minimum  value  per  share  should  be  500  marks  ($119),  and  that  the 
liability  of  the  member  should  be  three  times  the  amount  of  sha.res 
held- 

Jn  Austria  the  same  general  condition  is  found,  except  that  the 
value  of  the  shares  is  lower  than  found  in  Germany  and  the  average 
paid-up  capital  per  member  is  naturally  lower.  Of  the  2,862  Schulze- 
Delitzsch  banks,  which  furnish  particulars  of  their  working  condi- 
tion, in  Austria,  in  1910,  the  membership  was  1,704,090  and  the 
share  capital  only  192,000,000  crowns  ($38,400,000),  the  average 
paid-up  capital  per  member  being  only  about  112^  crowns  ($23). 
In  Italy  the  total  number  of  members  of  the  690  people's  banks  re- 
porting was  501,022,  while  the  paid-up  capital  (including  surplus) 
amounted  to  155,664,000  francs  ($30,042,152),  or  an  average  of  311 
francs  ($60)  per  member. 

liiABEurr. 

One  of  the  most  important  characteristics  of  the  people's  banks 
js  iheir  status  with  reference  to  the  liability  of  the  members.  Under 
any  system  of  cooperation  the  general  understanding  is  that  mutu- 
ality is  accepted  as  the  foundation;  in  other  words,  that  unlimited 
liability  is  accepted  by  the  members  and  that  each  member  pledges 
himself  to  be  liable  to  the  full  extent  of  his  resources  for  all  accounts 
of  the  society  to  which  he  belongs.  This  principle  has  been  found  to 
be  practicable  where  all  of  the  members  live  in  close  proximity  to 
each  other  and  are  generally  known  to  each  other.  This  has  been 
particularly  so  where  all  are  engaged  in  the  same  general  line  of 
work  and  are  of  the  same  general  economic  status.  More  particu- 
larly do  the  principles  of  unlimited  liability  obtain  successfully  where 
membership  is  quite  definitely  limited  to  a  comparatively  small 
number  and  where  the  members  are  carefully  selected. 

In  the  case  of  the  popular  banks  being  described,  generally  speak- 
ing, they  are  urban  in  character,  although  probably  about  one-fourth 
of  the  members  are  farmers.  In  the  second  place,  the  occupation  of 
the  members  ranges  over  a  great  variety  of  callings;  and  in  the 
third  place,  the  membership  is  quite  large,  in  fact,  so  large  that, 
generally  speaking,  it  would  be  impossible  for  any  one  member  to 
know  any  large  per  cent  of  the  other  members.  As  a  result  of  this, 
although  these  banks  started  as  unlimited  liability  societies,  they  have 
gradually  changed  in  many  respects.  Thus  in  1911  out  of  a  total  of 
952  banks  of  this  type  which  reported  in  Germany  563,  or  59.1  per 
cent,  were  of  the  unlimited  liability  type,  while  385,  or  40.5  per  cent, 
had  limited  liability,  and  4,  or  0.4  per  cent,  were  of  a  special  mixed 
type,  having  unlimited  liability  to  make  supplementary  j^ayments. 
The  general  tendency  is  in  the  direction  of  limited  liability,  but 


AGEICULTUEAL   CREDIT. 


15 


although  the  system  of  limited  liability  is  steadily  increasing,  un- 
limited liability  is  still  considered  the  best  system  on  which  to  estab- 
lish these  popular  banks  in  districts  which  are  not  yet  familiar  with 
cooperative  credit.  The  system  of  unlimited  liability  seems  to  work 
particularly  well  when  the  societies  are  just  beginning  and  while  the 
membership  is  small  and  the  members  acquainted  with  each  other. 

In  Austria,  out  of  the  3,599  banks  of  this  type  reporting  in  1912, 
only  603  were  based  upon  the  principles  of  unlimited  liability,  while 
2,996  had  adopted  the  principles  of  limited  liability.  In  Italy,  like 
Austria,  the  liability  of  the  members  is  limited. 


WORKING   CAPITAL. 

According  to  the  report  furnished  by  the  1,051  popular  banks  of 
Germany,  at  the  end  of  1911  the  aggregate  working  capital  was 
1,668,250,151  marks  ($397,045,535).  This  is  an  average  of  1,587,- 
298  marks  ($377,776)  per  bank.  The  average  per  bank  is  rapidly 
increasing,  as  shown  by  the  fact  that  the  average  for  all  banks  report- 
ing in  1886  was  only  617,000  marks  ($146,846)  ;  that  in  1898  was  800,- 
000  marks  ($190,400)  ;  and  that  in  1902  was  approximately  1,000,- 
000  marks  ($238,000).  The  average  working  capital  per  institution 
is  seen  to  be  nearly  three  times  as  great  as  it  was  20  years  ago. 

The  following  tables  show  the  details  for  the  1,051  popular  banks 
under  consideration  in  Germany  in  1911 : 

Popular  hanks  in  Germany  in  1911. 


Sources  from  which  funds  are  derived. 

Marks. 

l^erceni- 

age  of 

total 

working 

capital. 

Average 
per  bank 
(marks). 

The  banks'  own  fLiuii.i: 

Share  capital 

247,294,344 
105, 799,  G73 

14.8 
6.4 

235  294 

100,668 

Total 

353,094,017 

21.2 

335,960 

Capital  from  outside  sources: 

Private  deposits 

1,276,172,048 
38,984,086 

76.5 
2.3 

1,214,245 
37,093 

Debts  contracted  with  banks  or  associations 

Total 

1,315,156,1.34 

78.8 

1,251,338 

Total  working  capital 

1,668,250,151 

100.0 

1,587,298 

It  will  be  seen  that  only  14.8  per  cent  of  the  total  working  capital 
represents  share  capital,  6.4  per  cent  represents  reserve  funds,  thus 
making  the  proportion  of  the  banks'  own  funds  21.2  per  cent  of  the 
total  working  capital  of  these  institutions.  It  will  also  be  noticed 
that  more  than  three-fourths  of  the  total  working  capital  represents 
private  deposits,  showing  the  confidence  of  the  people  who  live  in 
the  vicinity  of  the  banks  of  this  type. 

The  average  amount  of  share  capital  per  bank  was  235,294  marks 
($56,000),  and  the  average  per  member  was  368  marks  ($87). 

It  was  originally  proposed  by  Schulze-Delitzsch  that  each  bank 
should  furnish  its  own  working  capital ;  in  fact,  for  many  years  this 
was  the  ambition  of  the  originators  of  this  ffj^stem  of  institutions. 


16  AGRICULTURAL    CREDIT. 

Seeing  that  this  was  impossible,  the  ideal  was  set  at  one-third  of  the 
working  capital.  Even  at  the  present  time  there  is  considerable 
agitation  in  favor  of  increasing  each  bank's  capital;  that  is  to  say, 
the  share  capital  and  the  bank's  reserve.  The  reason  that  this  does 
not  progress  more  rapidly  is  a  fact  that  will  be  particularly  stated 
under  a  discussion  of  the  dividends,  profits,  and  losses.  At  this  point 
it  is  only  necessary  to  indicate  that  these  institutions  work  for  high 
profits  or  dividends.  It  is  a  well-known  fact  that  the  interest  paid 
on  deposits  is  generally  very  low.  As  a  result,  the  higher  the  ratio 
of  the  banks'  own  funds  to  the  total  working  capital  the  lower  be- 
comes the  ratio  of  the  net  profits  to  the  share  capital,  and  the  lower, 
therefore,  becomes  the  dividend. 

The  experience  of  these  institutions  in  Germany  for  the  last  few 
years  is  that  it  is  possible  to  attract  a  very  large  capital  from  outside 
sources  in  the  way  of  private  deposits  by  the  payment  of  a  reasonable 
interest,  while  on  the  other  hand  it  is  a  much  slower  and  much  more 
difficult  jDroposition  to  accumulate  working  capital  by  increasing  the 
membership  and  increasing  the  share  capital  or  reserve  funds.  In- 
deed, during  the  last  few  years  the  increase  of  capital  from  outside 
sources  has  been  greater  relatively  than  the  increase  in  the  bank's 
own  funds,  thus  leaving  the  proportion  of  the  bank's  own  funds 
lower  at  the  present  time  than  what  it  was  some  years  back. 

A  further  analysis  of  the  item  "  private  deposits  "  discloses  the  fact 
that  the  banks  recognize  savings  deposits  as  distinct  from  ordinary 
deposits  subject  to  check.  The  savings  deposits  are  generally  much 
smaller  accounts  and  require  a  longer  period  of  notice  before  with- 
drawal. In  practice  this  distinction  means  but  very  little  at  the 
present  time  and  might  as  well  be  disregarded,  and  as  a  matter  of 
fact  is  rapidly  being  disregarded  by  the  people's  banks. 

It  would  doubtless  be  proper  to  add  the  sums  which  the  banks 
acquire  by  rediscounting  with  third  parties  the  bills  which  they 
have  discounted  for  their  members  to  the  debt  contracted  with  banks 
or  associations  if  the  total  funds  secured  from  the  outside  were  to  be 
shown.  At  the  end  of  1911  there  were  in  circulation  bills  for 
51,497,470  marks  ($12,256,398).  If  this  amount  were  added  to  the 
other  two  items  representing  outside  capital,  the  total  of  this  class 
would  be  1,366,653,604  marks  ($325,263,557). 

In  contrast  with  Germany,  the  total  share  capital  of  the  2,862  pop- 
ular banks  which  reported  m  Austria  in  1910  was  192,000,000  crowns 
($38,400,000),  an  average  of  67,086  crowns  ($13,417)  per  institution. 
The  reserve  for  these  same  institutions  amounted  to  109,000,000 
crowns  ($21,800,000),  an  average  of  38,085  crowns  (^$7,617)  per  insti- 
tution. The  total  amount  of  deposits  in  hand,  which  seem  to  be  com- 
parable with  the  item  "  private  deposits "  in  the  German  report, 
amounted  to  1,751,000,000  crowns  ($350,200,000)  or  611,810  crowns 
($122,362)  per  institution.  At  the  same  time  the  amount  of  loan 
capital,  which  it  would  seem  must  represent  debts  contracted  with 
banlcs  or  associations,  amounted  to  332,000,000  crowns  ($66,400,000), 
an  average  of  116,003  crowns  ($25,200)  per  institution. 

The  following  table,  constructed  from  data  available  for  Austria 
in  1910,  is  comparable  to  the  one  prepared  for  Germany  presented 
on  page  15. 


AGRICULTURAL   CREDIT. 
Popular  hanks  in  Austria  in  1910. 


17 


Scm'ccs  from  which  funds  are  derived. 

Crowns. 

Percentage 
of  total 
working 
capital. 

Average 
per  bank 
(crowns). 

The  banks'  own  funds: 

Share  capital  

192,000,000 
109,000,000 

8.0 
4.6 

67,086 

38,085 

Total      

301,000,000 

12.6 

105,171 

Capital  from  outside  sources: 

1,751,000,000 
332,000,000 

73.4 
14.0 

611, 8M) 
116, 003 

Loan  capital ■ 

Total 

2,083,000,000 

87.4 

727, 813 

Total  working  capital 

2,384,000,000 

100.0 

832, 984 

Turning  attention  now  to  the  situation  in  Italy,  the  latest  data 
available  in  complete  form  pertains  to  December  31,  1908.  At  that 
time  figures  were  compiled  for  690  institutions  with  a  membership 
of  501,022,  or  an  average  of  726  per  institution.  The  following  table 
shows  as  nearly  as  practicable  comparable  data  pertaining  to  the 
working  capital  in  Italy : 

Popular  banks  in  Italy  in  1909. 


Sources  from  which  funds  are  derived. 


Francs. 


Paid-up  capital 

Reserve  funds 

Current  account  and  savings  deposits 

Bills  accepted  and  payments  due 

Debit  renewals 

Rediscount  of  bUls 

Miscellaneous  creditors 

Total  working  capital 


98, 310, 108 
57,354,279 

971,167,644 
3, 158, 671 
20,251,029 
72, 260, 849 

151,591,163 


1,374,093,743 


Percentage 
of  total 
working 
capital. 


7.1 
4.1 

70.7 

.2 

1.4 

5.2 

11.3 


100.0 


Average 
per  insti- 
tution 
(francs). 


142, 478 
83, 122 
1,  f07.  4S9 
4,678 
29,349 
104, 726 
219,697 


1,991,440 


It  will  be  seen  that  the  total  paid-up  capital  represented  only  7.1 
per  cent  of  the  working  capital,  as  compared  with  14.8  per  cent  for 
Germany  and  8  per  cent  for  Austria.  It  will  also  be  noticed  that  the 
resei've  funds  amounted  to  only  4.1  per  cent,  as  compared  with  6.4 
per  cent  for  Germany  and  4.6  per  cent  for  Austria.  In  contrast,  it 
should  be  noted  that  the  current  account  and  savings  deposits,  which 
correspond  with  the  private  deposits  of  Germany  and  the  deposits  in 
hand  in  Austria,  represent  70.7  per  cent  of  the  total  working  capital 
of  Italy,  as  compared  with  76.5  per  cent  for  Germany  and  73.4  per 
cent  for  Austria. 

LOANS   AND   INVESTMENTS. 

It  is  just  as  important  to  examine  into  the  loans  and  investments  or 
the  credit  side  of  the  balance  sheet  as  it  is  to  examine  into  the  working 
capital  or  debit  side  of  the  balance  sheet.  A  brief  analysis  of  the 
use  made  by  these  popular  banks  of  the  funds  at  their  disposal  should 
therefore  be  made. 

S.  Doc.  380,  63-2,  pt.  iii 2 


18  AGRICULTURAL   CREDIT. 

The  principal  object  of  these  institutions  is  to  supply  credit  for 
their  own  members,  and  therefore  one  would  expect  that  they  would 
limit  themseh'es  to  the  particular  work  of  granting  loans  under  vary- 
ing forms  to  the  membership.  The  fact  that  loans  are,  as  far  as  pos- 
sible, strictly  limited  to  the  membership  is  one  of  the  most  important, 
if  not  the  most  important,  reasons  why  the  membership  is  so  large 
and  why  the  average  paid-up  capital  is  so  small.  It  is  impossible, 
however,  to  make  the  funds  on  hand  in  banks  exactly  balance  the  de- 
mands for  credit  by  their  members.  It  is  therefore  necessary,  when 
ihe  working  capital  supplied  by  the  paid-up  share  capital,  surplus 
funds,  and  deposits  are  insufficient,  to  borrow  from  outside  sources, 
and  it  is  equally  desirable,  where  the  working  funds  referred  to  ex 
ceed  the  demand  of  the  members,  to  seek  outside  fields  of  investment. 

It  is  also  desirable  to  create  a  surplus  fund  for  the  safety  of  their 
own  operations  in  case  of  insolvency  of  their  members  or  the  sudden 
withdraAval  by  the  members  of  their  deposits.  Naturally  this  sur- 
plus would  not  be  loaned  to  the  members,  but  would  be  invested  else- 
where. 

In  Germany  all  loans  to  members  are  referred  to  as  "  loans,"  while 
loans  of  other  types  are  referred  to  as  "  investments."  According  to 
the  credit  side  of  the  balance  sheet  of  the  1,051  people's  banks  in  Ger- 
many in  1911,  82.9  per  cent  represented  outstanding  loans  to  mem- 
bers, while  17.1  per  cent  represented  loans  of  other  kinds  referred  to 
as  "investments."  An  examination  of  the  details  concerning  the 
286,051,023  marks  ($68,080,143),  or  17.1  per  cent,  which  represents 
the  so-called  "  investments,"  shows  that  4.2  per  cent  represents 
cash  in' hand,  deposits  with  banks,  etc.;  1.2  per  cent  bankers'  accept- 
ances ;  6.5  per  cent  shares  of  stock  or  bonds  held  as  investments ;  and 
3.5  per  cent  real  property,  about  one-half  of  which  represents  the 
offices,  etc.,  the  remainder  being  other  real  estate. 

Referring  now  to  the  loans  to  members,  the  most  important  indi- 
vidual group  or  class  is  that  known  as  "  loans  on  current  account." 
The  total  amount  of  this  class  as  shown  by  the  balance  sheet  at  the 
close  of  1911  was  544,065,524  marks  ($129,487,595),  or  32.4  per  cent 
of  the  total  credit  of  the  institutions  under  consideration. 

The  next  most  important  item  is  referred  to  as  "  loans  for  fixed 
periods,"  the  amount  being  469,660,330  marks  ($111,779,158),  or  28 
per  cent  of  the  total. 

In  addition  to  these  two  items,  reference  should  be  made  to  the 
discount  of  commercial  bills,  amounting  to  218,997,012  marks 
($52,121,290),  or  13.1  per  cent;  and  "mortgages  and  other  land 
credits,"  amounting  to  158,086,387  marks  ($37,624,560),  or  9.4  per 
cent  of  the  total  credit. 


AGRICULrURA.L   CREDIT.  19 

The  composition  of  the  assets  is  seen  from  the  table  which  follows : 
Assets  of  popular  banis  in  Germany  in  1911. 


Particulars. 


Loans  for  fixed  periods 

Loans  on  current  account 

Discount  of  commercial  bills 

Mortgages  and  other  land  credits 

Investments 

Cash  in  hand,  deposits  with  banks,  etc, 

Bankers'  acceptances 

Real  property 

Offices,  etc 

Other  real  property 

Miscellaneous  items 

Shares  and  bonds 

Total 


Marks. 


469, 

644, 

21S, 

15S, 

286, 

VI, 

20, 

58, 

30, 

27, 

27, 

108, 


600,330 
065, 524 
;i97,012 
186,3,87 
051,023 
000,000 
800,000 
400,000 
700,000 
700,000 
651,023 
200,000 


1,676,860,276 


I'er  cent. 


28. 0 

32.4 

13.1 

9.4 

17.1 

4.2 

1.2 

3.5 

1.8 

1.7 

1.7 

6.5 


100.0 


Average 
per  in- 
stitution 
(marks). 


446,869 

517,664 

208,370 

150,415 

272, 170 

67,5.54 

19,790 

55, 566 

29, 210 

26, 356 

26, 309 

102, 949 


1,595,488 


It  will  be  seen  that  the  total  amount  of  loans  at  the  close  of  the 
year  1911  was  1,390,809,253  marks  ($332,012,602),  or  an  average  of 
1,323,318  marks  ($314,950)  per  institution. 

In  contrast  it  should  be  noted  that  the  loans  outstanding  at  the 
end  of  the  year  1910  for  2,862  Schulze-Delitzsch  banks  of  Austria 
.which  furnished  particulars  was  1,985,000,000  crowns  ($397,000,000), 
or  693,571  crowns  ($138,714)  per  institution. 

It  should  be  noted  also  that  the  total  amount  of  loans  gi-anted 
during  the  year  1911  for  the  1,051  popular  banks  of  Germany  was 
4,647,752,971  marks  ($1,106,165,207),  which  is  an  average  of  4,422,219 
marks  ($1,052,488)  per  institution. 

In  the  case  of  the  2,862  Austrian  banks  under  consideration  the 
total  amount  of  loans  granted  during  the  year  1910  was  2,087,000,000 
crowns  ($417,400,000),  or  an  average  of  729,210  ($145,842)  per 
institution. 

A  study  of  the  rules  governing  loans  and  investments  shows  that 
in  the  ca.se  of  fixed-period  loans  a  guaranty  is  almost  universally 
demanded.  Only  in  the  most  exceptional  cases  are  loans  granted 
without  guaranty.  Of  the  aggregate  fixed-period  loans  less  than  2 
per  cent  are  in  this  class.  The  guaranty  usually  demanded  is  either 
a  special  guaranty  in  the  form  of  pledges  or  a  personal  guaranty 
in  the  form  of  surety.  Loans  on  personal  guaranty  form  86.7  per 
cent  of  the  total  loans  for  fixed  periods.  Only  11.4  per  cent,  which  is 
all  of  the  remainder,  is  advanced  with  pledges  as  guaranty. 

From  the  fact  that  more  than  seven-eighths  of  all  loans  for  fixed 
periods  are  secured  by  personal  guaranty,  it  is  clear  that  these 
popular  banks  are  serving  the  needs  of  the  particular  classes  of 
persons  for  whom  they  were  originally  established;  that  is  to  say, 
persons  who  are  in  a  position  to  furnish  security  necessary  for  doing 
business  with  ordinary  banks. 

The  borrower  may  give  as  receipt  for  the  debt  his  simple  note  of 
hand,  or  an  "  accommodation  bill."  The  employment  of  bills  in  this 
connection  is  one  of  the  characteristics  of  the  Schulze-Delitzsch  sys- 
tem, the  desire  being  to  train  the  debtors  of  the  banks  to  punctuality 
in  business  and  at  the  same  time  to  simplify  the  collection  of  the  in- 
terest. 


20  AGEICULTUBAL   CREDIT. 

Finally  the  popular  banks  having  familiarized  their  cnstomers 
with  the  use  of  bills  have  succeeded  in  diffusing  the  business  of  bill- 
discounting.  As  a  general  rule,  the  loans  are  fixed  at  90  days.  This 
term  may  be,  and  generally  is,  considered  extended  by  renewals 
which,  however,  are  generally  conditional  on  the  repayment  in  cash 
of  at  least  10  per  cent  of  the  amount.  At  each  time  that  bills  fall 
due,  after  a  small  amount  has  been  paid,  a  new  bill  is  created  for  the 
lower  amount.  Thus  the  members  of  the  banks  become  accustomed 
to  the  payment  of  their  obligations  by  installments.  They  also  are 
accustomed  to  punctuality  in  their  dealings,  and  payment  is  made 
more  easily. 

As  noted  elsewhere,  loans  on  current  account  represent  the  largest 
individual  class  or  type  of  business  done,  and  differ  from  loans  for 
fixed  periods  in  that  the  loan  is  not  made  out  for  a  fixed  period  of 
time  or  for  a  fixed  amount.  The  general  rule  is  that  a  maximum 
is  established  and  the  borrower  is  allowed  to  secure  credit  from  the 
bank  at  any  time  within  the  maximum  amount.  During  this  same 
time  the  borrower  may  make  deposits  and  in  that  way  repay  the 
loan  wholly  or  in  part  at  any  time.  It  is  also  true  that  frequently 
borrowers  have  paid  in  amounts  exceeding  the  amount  borrowed  and, 
therefore,  have  funds  placed  to  their  credit.  Loans  made  on  current 
accounts,  like  those  made  for  fixed  periods,  may  be  guaranteed  by 
surety,  goods,  or  other  effects,  or  even  farm  mortgages. 

The  third  type  of  loan  referred  to,  amounting  to  13.1  per  cent  of 
the  total  loans  and  investments  for  the  1,051  popular  banks  of  Ger- 
many in  1911,  was  entirely  "  discount  of  commercial  bills."  These 
refer  to  commercial  bills  which  actually  represent  dealings  in  goods. 
They  must  be  paid  on  falling  due  in  their  entirety.  For  this  reason 
they  not  only  afford  extensive  security  to  the  popular  banks,  but  they 
may  in  turn  be  rediscounted  with  other  institutions  whenever  it  is 
necessary  to  increase  the  working  capital.  As  noted  elsewhere,  at  the 
end  of  1911  there  were  in  circulation  bills  rediscounted  with  third 
parties  amounting  to  51,497,470  marks  ($12,256,398). 

The  popular  banks  of  Germany  and  other  European  countries — 
much  like  the  national  banks  of  this  country — do  not  have  at  their 
disposal  capital  adapted  to  the  form  of  investment  represented  by 
mortgage  and  other  land-credit  instruments,  and  as  a  result  only  9.4 
per  cent  of  the  loans  and  investments  represent  mortgage  and  other 
land  credits. 

It  is  impossible  to  determine  when  the  banks  are  dealing  with 
genuine  mortgage  business  and  not  merely  with  mortgages  accepted 
as  additional  security  for  loans  granted  under  other  forms.  This  is 
equally  true  with  banks  of  this  country. 

PROFTTS  AND  LOSSES. 

The  officers  of  the  International  Institute  of  Agriculture  at  Rome, 
in  referring  to  the  Scnulze-Delitzsch  banks  of  Germany,  stated, 
"  They  accumulate  a  considerable  quantity  of  capital  and  they  dis- 
tribute fairly  high  dividends."  In  the  matter  of  dividends,  indeed, 
the  Schulze-Delitzsch  banks  differ  very  little  from  the  various  kinds 
of  commercial  banks  in  the  United  States. 

In  order  to  illustrate  this  point  reference  might  be  made  to  the 
fact  that  the  gross  profits  realized  in  1911  by  the  1,0*1  banks  reporting 


AGRICULTURAL    CREDIT.  21 

was  practically  90,000,000  marks.  Out  of  this,  however,  approxi- 
mately 50,000,000  marks  were  paid  in  the  form  of  interest  on  capital 
from  outside  sources.  The  gross  profits  represented  5.29  per  cent 
of  the  total  working  capital.  The  total  amount  of  interest,  however, 
paid  on  borrowed  working  capital  represented  only  3.86  per  cent  of 
the  total  working  capital.  It  will  thus  be  seen  that  the  institutions 
secured  their  working  capital  at  a  comparatively  low  rate  and  they 
are  thus  able  to  work  on  a  margin  of  interest  which  allows  them  a 
very  satisfactory  profit  without  pressing  unduly  on  their  debtors. 

The  cost  of  management  during  the  year  1911  was  about  14,000,000 
marks,  being  16.27  per  cent,  or  about  one-sixth  of  the  gross  profits. 
This,  however,  was  only  0.09  per  cent  of  the  total  business  done. 
After  all  expenses  had  been  paid,  including  interest  on  all  borrowed 
capital,  general  expenses,  depreciation,  and  all  losses,  the  net  profits 
remaining,  which  included  the  balance  from  the  preceding  year, 
amounted  to  22,000,000  marks.  This  is  8.45  per  cent  of  the  share 
capital,  showing  a  very  satisfactory  result. 

All  of  the  net  profits  are  not  distributed  by  the  Schulze-Delitzsch 
banks,  which,  as  shown  above,  are  very  anxious  to  bring  their  reserve 
up  to  a  very  high  level.  Of  the  net  profits,  29.7  per  cent,  therefore, 
was  placed  in  the  reserve  fund  in  1911.  In  addition  to  this  large  pro- 
portion placed  in  the  reserve,  a  considerable  amount  was  also  ex- 
pended in  aid  of  propaganda  work  which  is  carried  on,  such  as  the 
publication  of  literature,  the  employment  of  organizers,  etc.  This 
would  be  an  unheard  of  thing  in  the  business  of  banks  in  the  United 
States.  But  further  than  this,  a  considerable  part  of  the  net  profits 
was  donated  by  the  banks  for  works  of  public  utility,  and  a  consider- 
able amount  was  also  distributed  among  the  several  employees  in  the 
form  of  bonus.  Thus  these  popular  institutions  recognize  employees 
not  on  a  strictly  profit-sharing  basis,  but  recognize  them  in  such  a 
way  as  to  share  with  them  the  net  profits.  Only  about  60  per  cent 
of  the  net  profits,  which  in  1911  amounted  to  13,000,000  marks,  was 
distributed  in  the  form  of  dividends.  Even  at  this  the  dividends  are 
comparatively  high  and  intentionally  so  in  order  that  the  members 
will  purchase  stock  and  pay  for  the  shares  as  quickly  as  possible, 
thus  giving  the  institutions  a  good  working  capital  of  their  own. 
Dividends  declared  are  calculated  in  proportion  to  the  amount  actu- 
ally paid  up  on  the  share  or  shares  of  the  individual  members. 

A  recent  investigation  showed  that  a  considerable  number  of  per- 
sons become  members  without  any  view  of  borrowing,  but  merely 
for  the  sake  of  investing  their  savings  in  shares  of  stock  in  order  to 
get  the  high  rate  of  interest.  Shares  are  frequently  as  high  as  $375, 
but  inasmuch  as  the  shares  may  be  partly  paid  in  at  the  beginning 
and  gradually  paid  in  completely  this  is  no  obstacle.  Dividends  of 
6  and  7  per  cent  are  not  uncommon,  and  this  is  a  decided  incentive 
for  persons  to  become  members.    Cahill  (p.  19)  says  on  this  point: 

This  is  probably  especially  true  of  a  large  proi)ortion  of  the  women  members 
returned  as  belonging  to  this  group,  and  who  numbered  13,203  out  of  a  total  of 
170,673.  or  7.7  per  cent,  in  1011. 

Although  these  institutions  distributed  only  6  per  cent  of  the  net 
profits  in  1911,  753,  or  more  than  two-thirds  of  the  banks  reporting, 
distributed  dividends  ranging  from  5  to  7  per  cent.  Wlien  compared 
with  the  rate  of  interest  charged  the  borrower  and  the  rate  of  interest 
paid  on  deposits,  this  seems  to  be  a  very  satisfactory  business  basis. 


22  AGBICULTTJEAL   CEEDIT. 

An  examination  of  various  extremes  shows  that  two  banks  dis- 
tributed dividends  of  only  2  per  cent,  but  on  the  other  hand  14  banks 
reached  10  per  cent,  1  bank  paid  a  dividend  of  18  per  cent,  and 
another  a  dividend  of  25  per  cent,  thus  showing  that  some  of  these 
institutions  are  extremely  profitable.  Clearly  the  institutions  paying 
such  high  percentages  of  dividends  have  a  comparatively  small 
paid-up  share  capital  and  comparatively  large  amounts  of  deposits, 
but  the  effort  is  to  increase  the  share  capital. 

What  has  been  said  with  reference  to  the  situation  in  Germany 
applies  with  practically  the  same  force  to  the  other  countries  where 
this  type  of  institution  is  found  in  existence.  Without  going  into  any 
considerable  amount  of  detail,  it  is  worth  while  to  note  that  in  Italy 
the  dividends  on  paid-up  capital  averaged  nearly  9^  per  cent  during 
the  years  1880-1882.  Since  that  time  the  share  capital  has  gi'adually 
increased,  as  noted  elsewhere,  in  proportion  to  the  working  capital, 
and  as  a  result  dividends  on  paid-up  capital  have  not  been  quite  as 
high.  They  are  still  high,  however,  averaging  in  every  year  for 
which  complete  reports  were  obtained  nearly  if  not  quite  7  per  cent, 
and  in  some  years  during  the  last  decade  averaging  over  8  per  cent. 

CENTRAL  BANKS  AND  FEDERATIONS. 

The  people's  banks  do  not  stand  entirely  alone;  they  are  related  to 
each  otner  through  systems  of  clearing  houses  and  federated  centrals, 
and  are  in  constant  touch  wdth  other  financial  institutions.  This 
feature  of  the  system  has  been  so  frequently  and  thoroughly  pre- 
sented in  printed  reports  that  it  seems  unnecessary  to  describe  it 
in  detail  in  this  briei  statement. 

SUMMARY. 

From  an  examination  of  the  above  statement  of  facts,  it  is  clear  that 
the  small  national  banks,  together  with  a  very  large  number  of  State 
and  private  banks,  differ  only  in  minor  details  from  the  people's 
banks  of  Europe.  The  real  important  difference  is  the  fact  that  the 
people's  banks  of  Europe  have  adapted  themselves  much  better  to  the 
needs  of  farmers  and  grant  loans  extending  over  a  sufficient  period  of 
time  so  that  farmers  are  able  to  patronize  them  and  get  thoroughly 
satisfactory  results. 

RAIP^FEISEN  SOCIETIES  OR  RURAL  CREDIT  UNIONS. 

It  is  not  at  all  likely  that  the  present  system  of  National,  State, 
and  private  banks  and  trust  companies,  even  if  the  recommendations 
made  by  this  commission  are  adopted,  will  properly  take  care  of 
all  the  needs  of  all  farmers  for  short-term  or  personal  credit.  There 
are  in  the  United  States  nearly,  if  not  quite,  six  and  one-half  million 
farms  at  the  present  time.  Of  these  only  about  4,000,000  are  ojjerated 
by  owners  and  managers.  In  the  whole  country  more  than  800,000 
farms  are  less  than  20  acres  in  size.  Some  of  these  are  inten- 
sively cultivated  and  their  operators  doubtless  have  definite  connec- 
tions with  banks,  but  most  of  them  are  probablj'  not  recognized  in  the 


AGRICULTURAL    CREDIT.  23 

regular  banking  asscM:iations  of  the  present  day.  At  the  same  time 
hundreds  of  thousands  of  farms  larger  than  20  acres  in  size  are  op- 
erated by  farmers  who  have  no  direct  relation  with  the  present 
banking  system.  It  is  very  probable  that  only  a  small  proportion  of 
the  two  and  one-third  million  tenants  have  regular  banking  con- 
nections. Institutions  to  meet  the  needs  of  these  operators  of  small 
farms  and  these  tenant  operators  must  be  seriously  considered. 

In  addition  to  these  it  should  be  noted  that  during  the  average 
year  approximately  3,000,000  farm  operators  employ  labor.  These 
laborers  should  have  an  opportunity  to  open  bank  accounts,  but 
their  business  is  so  small  that  they  do  not  at  the  present  time  have 
any  bank  connections.  All  told  there  are  literally  millions  of  the 
farm  population  who  have  not  at  the  present  time  any  banking  rela- 
tion worthy  of  note.  The  needs  of  this  type  of  farmers  and  farm 
laborers  have  been  taken  care  of  very  largely  in  European  countries 
by  small  institutions,  popularly  known  as  "  RaifFeisen  societies," 
"  credit  unions,"  "  credit  associations,"  "  credit  societies,"  etc.  In- 
stitutions similar  to  these  are  needed  in  the  United  States;  if  not  in 
every  State,  at  least  in  the  great  majority  of  States;  and  if  not  in 
every  community,  at  least  in  many  communities.  In  order  that 
these  institutions  may  be  thoroughly  understood,  the  following  brief 
description  is  appended,  which  shows  in  a  summary  Vv'ay  the  most 
important  characteristics  of  these  societies  in  the  countries  where 
they  are  most  highly  developed. 

NUMBER  OF  BANKS,   MEMBERSHIP,  AND  AREA  OF  OPERATION. 

During  the  last  three  decades  credit  imions  under  various  names 
have  increased  rapidly  in  number.  Indeed,  prior  to  1880  the  number 
was  very  small  and  the  system  not  well  known,  but  at  the  present  time 
farmers  in  all  parts  of  Europe  understand  credit  unions  and  talk 
in  terms  of  "  credit  unions "  as  readily  as  farmers  in  the  United 
States  talk  in  terms  of  "  corn  "  or  any  other  farm  product.  In  Ger- 
many alone  there  are  at  the  present  time  probably  17,000  of  these 
societies,  while  20  years  ago  the  number  was  only  about  1,700.  This 
is  representative  of  the  change  that  has  taken  place  in  other  countries 
as  well. 

The  first  news  concerning  these  institutions  was  brought  to  Italy 
in  1880,  and  a  few  years  afterwards  a  credit  union  was  started.  At 
the  present  time  there  are  more  than  2,000  in  Italy.  In  Austria  the 
movement  started  in  1886,  and  credit  unions  have  been  increasing 
rapidly  in  number  ever  since  the  first  one  was  established;  at  the 
present  time  there  are  about  8,000.  Similar  illustrations  could  be 
cited  with  reference  to  other  countries.  Most  recent  to  take  up  the 
credit-union  idea  is  Ireland,  and  success  there  is  well  known.  The 
farmers  of  Russia  are  rapidly  establishing  these  institutions  as  are 
the  French  farmers.  The  credit  union  is  a  well-known  institution  in 
eastern  Canada,  where  large  numbers  of  societies  have  been  estab- 
lished. In  some  parts  of  the  United  States  farmers  arc  already  talk- 
ing in  terms  of  credit  unions,  and  students  of  the  subject  have  com- 
menced to  urge  their  establishment,  but  as  yet  the  movement  is  rather 
new. 

Turning  now  to  the  question  of  membership  it  should  be  noted 
that  the  average  number  of  members  per  bank  m  Germany  is  ap- 


24  AGRICULTURAL   CREDIT. 

proximately  100.  Thus  in  Germany  probably  1,700,000  farmers  be- 
long to  credit  unions.  The  same  general  average  number  per  insti- 
tution is  found  in  other  countries  and,  therefore,  the  extraordinary 
extent  to  which  farmers  have  organized  these  small  credit  societies 
must  be  clear.  The  number,  however,  varies  materially  from  one 
institution  to  another.  For  instance,  in  Germany  the  minimum  num- 
ber of  farmers  necessary  to  establish  a  credit  union  is  seven,  and  at  the 
time  of  the  visit  of  the  United  States  commission  the  authorities 
reported  the  fact  that  six  societies  existed  with  the  minimum  number 
of  members.  On  the  other  hand,  one  credit  union  had  15  times  the 
average  number  of  members. 

The  small  number  of  members  in  each  credit  union  clearly  indicates 
the  general  type  of  institution  under  consideration.  But  it  should  be 
noted  that  the  members  are  almost  always  located  in  the  same  com- 
munity and  are  not  widely  scattered  over  any  district.  In  Italy  the 
sphere  of  operation  of  rural  banks  is  restricted  to  a  commune,  a  por- 
tion of  a  commune,  or  a  parish.  Similarlj^  in  other  countries  the 
smallest  subdivision  is  generally  used  as  the  area  of  organization. 

ENTRANCE  FEES  AND  SHARE  CAPITAL. 

According  to  the  conceptions  of  the  originators  of  the  credit 
unions,  entrance  fees  were  not  advocated  because  of  the  idea  of  mutual 
help  which  was  then  predominant.  For  many  years  as  a  result  of 
this  original  idea  entrance  fees  were  unknown.  As  institutions 
established  themselves,  however,  in  different  parts  of  the  country 
variations  in  fundamental  plans  took  place,  and  in  some  districts 
entrance  fees  became  an  important  feature.  These  fees  were  immedi- 
ately placed  in  the  reserve  fund  and  did  not  draw  interest  but  were 
used  as  a  revolving  fund  to  carry  on  the  business  of  the  organization. 

Just  as  entrance  fees  were  not  countenanced  during  the  early  years, 
so,  too,  share  stock  was  excluded  in  order  to  avoid  any  possible  chance 
of  capitalistic  speculation.  Until  1876  credit  unions  were  established 
without  any  share  capital.  In  that  year  the  imperial  law  of  Germany 
compelled  all  cooperative  societies  to  have  foundation  capital,  and  as 
a  result  German  rural  credit  unions  since  that  time  have  had  small 
amounts  of  capital  stock.  In  order  to  keep  away,  however,  from  the 
capitalistic  idea,  the  shares  were  placed  at  the  very  minimum  price 
and,  generally  speaking,  even  yet  the  maximimi  price  of  shares  is  only 
about  $2.50.  In  some  regions  the  average  paid-up  share  capital  per 
member  is  only  $1  or  $1.50.  On  the  other  nand,  one  group  of  credit 
unions  has  made  an  effort  to  increase  the  share  capital  and  compara- 
tively large  shares  have  been  recommended,  but  in  these  cases  the 
highest  price  has  been  approximately  $125  per  share.  The  credit 
unions  striving  for  a  large  share  capital  have  had  in  mind  strength- 
ening the  institution  Avith  reference  to  the  securing  of  deposits,  mak- 
ing of  loans,  etc.,  but  even  at  the  present  time  share  capital,  generally 
speaking,  is  an  unimportant  feature. 

It  was  noted  above  that  in  Germany  the  share  capital  represented 
14.8  per  cent  of  the  total  working  capital  in  "  popular  banks."  In 
contrast,  the  share  capital  represents  only  1.2  per  cent  of  the  total 
working  capital  in  the  case  of  "  credit  unions  "  throughout  the  Ger- 
man Empire.  In  Italy,  as  a  rule,  the  rural  banks  or  credit  unions 
have  no  real  initial  capital,  and  in  Austria,  the  credit  unions  being 


AGRICULTURAL   CREDIT.  25 

modeled  after  the  Geriuaii  societies  of  the  same  type,  each  member  is 
required  to  take  a  share,  which,  however,  varies  in  amount  from 
about  $2  to  $4. 

LIABILITY. 

The  principle  maintained  by  the  credit  unions  throughout  the 
early  period  of  their  development  was  that  of  unlimited,  joint,  and 
several  liability  of  all  members.  It  is  true  that  the  principles  of 
limited  liability  are  found  more  and  more  in  many  other  forms  of 
cooperation  throughout  Europe,  but  all  authorities  urge  that  the 
principles  of  unlimited  liability  be  maintained  in  connection  with 
the  credit  unions.  At  the  present  time  92  out  of  every  100  credit 
unions  in  Germany  continue  to  maintain  the  rules  of  unlimited  lia- 
bility, while  only  8  out  of  every  100  have  adopted  limited  liability. 
In  these  few  cases  where  limited  liability  has  been  adopted  consid- 
erable share  capital  is  found,  and  these  few  may  well  be  referred  to  as 
a  movement  in  the  direction  of  popular  banks,  varying  in  many  of 
their  details  from  the  true  credit  unions.  Here  and  there  a  credit 
union  is  based  upon  an  intermediate  system  commonly  referred  to  as 
the  system  of  unlimited  liability  "  to  make  supplementary'^  payments." 

This  particular  variation  of  the  principles  of  unlimited  liability  is 
found  best  developed  in  Austria.  Indeed,  the  Austrian  Government 
presented  a  bill  to  Parliament  in  1911  modifying  the  law  relating  to 
cooperative  societies,  and  the  main  purpose  of  the  bill  presented  was 
to  substitute  the  system  of  unlimited  liability  "  to  make  supple- 
mentary payments"  for  the  present  system  of  unlimited,  joint,  and 
several  liability  of  all  members.  The  difference  between  the  two  sys- 
tems consists  m  the  fact  that,  according  to  the  new  proposals  the 
creditor  would  not  be  able  to  have  direct  recourse,  in  case  of  the 
liquidation  of  the  credit  union,  to  any  particular  member  and^  there- 
fore, could  not  demand  the  payment  of  the  sum  which  remains  due 
to  him.  The  society  or  credit  union  would  be  responsible  to  the 
creditor,  and  as  such  the  credit  union  would  have  the  right  to  demand 
pro  rata  payments  from  the  members  until  the  creditors  were  com- 
pletely satisfied. 

In  Italy,  as  in  Germany,  the  rule  is  unlimited  liability.  The 
whole  purpose  of  this  important  rule  is  to  prevent  the  misuse  of  the 
loans  by  compelling  members  to  keep  an  eye  upon  one  another  and 
see  that  loans  are  not  abused.  At  the  same  time  this  rule  gives  the 
credit  unions  the  confidence  of  the  public,  and,  since  these  little 
societies  depend  upon  the  public  for  deposits  as  working  capital,  the 
confidence  of  the  public  must  be  secured  and  maintained. 

WORKING  CAPITAL. 

It  has  already  been  pointed  out  that  share  capital  is  a  very  unim- 
portant part  of  the  total  Avorking  capital  of  the  credit  unions  of 
Europe.  To  this  may  be  added  the  statement  that  the  reserve  fund 
also  is  a  comparatively  unimportant  part  of  the  total.  But  com- 
pared with  the  share  capital  the  reserve  holds  a  very  important  place. 
Thus  in  Germany  the  resei've  funds  are  more  than  twice  the  share 
capital.  The  same  may  be  said  as  a  general  thing  for  Europe  as  a 
whole.  This  will  be  better  understood  when  reference  is  made  to  the 
fact  that  profits  or  net  earnings  are  generally  turned  into  the  reserve 
fund  and  not  distributed  to  the  members. 


26  AGRICULTURAL   CREDIT. 

The  most  important  source  of  the  working  capital  is  found  in 
deposits  on  current  account  and  savings  deposits.  This  point  was 
carefully  discussed  in  connection  with  the  popular  banks  and  need 
not  be  considered  in  great  detail  here,  except  to  indicate  that  iust  as 
share  capital  is  a  more  important  feature  in  "  popular  banks,"  so 
private  deposits  are  a  moi-e  important  feature  when  "  credit  unions  " 
are  under  consideration.  These  observations  pertain  chiefly  to  Ger- 
many, Austria,  and  Italy.  Just  as  the  popular  banks  secured  more  or 
less  of  their  working  capital  from  outside  sources,  so,  too,  the  credit 
unions  depend  upon  the  outside  to  keep  the  margin  necessary  for 
satisfactory  business  operations.  In  some  countries,  such  as  Hun- 
gary, France,  and  probably  Russia,  large  dependence  is  placed  upon 
funds  secured  from  outside  sources.  Central  institutions  look  after 
this  business  and  act  as  clearing  houses  for  the  thousands  of  small 
credit  unions. 

In  Germany  as  a  whole  probably  less  than  10  per  cent  of  the  total 
working  capital  comes  from  transactions  with  outside  institutions, 
showing  in  contrast  with  some  other  countries  how  largely  these 
small  credit  unions  are  self-managing  and  self-sufficing  societies. 
They  depend  almost  entirely  upon  the  local  deposits  to  take  care  of 
the  demands  for  money  or  credit.  In  any  effort  to  classify  the  de- 
posits, note  should  be  made  of  the  fact  that  deposits  on  "current 
account "  represent  less  than  10  per  cent  of  the  total  working  capital, 
while  "  savings  deposits  "  are  nearly  80  per  cent  of  the  total  working 
capital.  When  we  remember  that  the  total  working  capital  of  these 
credit  unions  in  Germany  alone  is  more  than  $500,000,000,  the  extent 
to  which  these  small  primary  units  have  succeeded  and  extended  their 
influence  throughout  the  Empire  is  very  impressive. 

Probably  the  distribution  of  the  working  capital  of  these  institu- 
tions is  much  less  important  than  the  average  working  capital  and 
the  various  parts  thereof  per  institution.  The  popular  banks  were 
compared  in  many  respects  with  the  small  national,  state,  and  pri- 
vate banks  of  the  United  States.  The  credit  unions  have  as  yet  prac- 
tically no  counterpart  in  this  country.  Thus  the  total  working 
capital  of  the  average  "  popular  bank "  in  Germany  was  given  as 
not  far  from  $400,000.  In  contrast,  the  average  working  capital  of 
each  "credit  union"  is  only  about  $40,000.  Further  comparison 
shows  that  the  average  share  capital  for  "  popular  banks  "  in  Ger- 
many is  between  $50,000  and  $60,000,  while  the  average  share  capital 
for  all  "credit  unions"  is  less  than  $500,  Fuither  comparison  in 
detail  is  unnecessary,  since  the  general  statement  may  be  made  that 
the  average  credit  union  is  about  one-tenth  the  size  of  the  average 
popular  bank.  The  credit  union  is  the  primary  unit  and  is  found  so 
thoroughly  established  throughout  Europe  that  its  importance  in  the 
flnaneial  system  can  not  be  ignored.  The  importance  of  similar  insti- 
tutions to  this  country  must  be  apparent,  and  the  detailed  descrip- 
tion is  given  only  to  indicate  the  position  which  these  societies  might 
hold  in  his  country. 

The  following  table  shows  the  details  for  12,797  credit  unions  in 
Germany  from  which  detailed  information  was  secured.  As  noted 
above  there  are  in  Germany  about  17,000  of  these  credit  unions,  but 
complete  details  could  I'ot  be  secured  from  all  since  they  are  not  under 
general  Federal  supervision  in  any  way  and  statistics  must  be  secured 
from  federations  of  credit  unions : 


AGRICtTLTURAI.    CREDIT. 


27 


The  banks'  own  funds: 

Share  capital 

Reserve 

Total 

Capital  from  outside  sources: 
Deposits  on  current  account 

Savings  deposits 

Other  liabilities 

Total 

Total  working  capital 


Amount. 


Marks. 

24,047,345 

57,168,784 


81,216,129 


206,530,460 

1,659,073,346 

181,078,836 


2,046,682,642 


2,127,898,771 


Percentage 

of  tlie  total 

working 

capital. 


1.2 

2.6 


3.8 


9.7 
78.0 

8.5 


100.0 


.Average  per 
bank. 


Marks. 
1,879 
4,468 


6,347 


16, 139 

129,644 

14,151 


159,934 


166,281 


Before  passing  from  this  subject  it  may  be  noted  that  great  varia- 
tions are  found  in  the  details  when  different  credit  unions  are  under 
consideration,  but  the  variations  are  no  greater  than  those  found  in 
national,  state,  and  private  banks  of  this  country;  and  the  varia- 
tions between  the  institutions  in  the  German  Empire  are  no  gi-eater 
than  those  between  Germany  and  Italy,  Austria,  Ireland,  or  Russia. 
It  is  therefore  unnecessary  to  present  detailed  statistics  showing  the 
status  of  the.se  small  primary  credit  societies  in  the  different  coun- 
tries where  these  institutions  were  inspected.  It  should  be  noted  in 
passing  that  while  in  some  countries  the  local  deposits  play  an  impor- 
tant part  in  others  local  deposits  are  insignificant. 

LOANS   AND    INVESTMENTS. 

The  real  object  of  these  banks  or  credit  unions  is  to  secure  credit 
and  money  for  the  members,  and  it  therefore  naturally  follows  that 
the  capital  obtained  from  the  various  sources  just  examined  is  used 
almost  entirely  for  making  advances  to  members.  In  institutions 
where  the  working  capital  exceeds  the  demand  of  the  local  community 
the  surplus  is  devoted  to  safe,  profit-yielding  investments,  and  the 
common  practice  is  to  deposit  this  chiefly  in  central  institutions.  The 
leading  classification  of  the  loans  and  investments  may  be  best  indi- 
cated as  follows:  Loans  are  made,  first,  for  fixed  periods;  and,  second, 
on  current  account.  Other  assets  represent  investments,  deposits  in 
institutions,  etc.  Just  as  the  savings  deposits  are  about  eight  times 
as  important  as  the  deposits  on  current  account  in  Germany,  so  loans 
made  for  fixed  periods  are  about  three  times  as  important  as  loans 
on  current  account.  Continuing  to  u^e  Germany  as  an  illustration, 
we  find  that  more  than  55  per  cent  of  all  loans  and  investments  are 
made  for  fixed  periods,  whereas  less  than  22  per  cent  are  on  current 
account. 

In  connection  with  loans  and  investments,  the  "amount"  of  loans 
is  important,  but  the  "period"  of  loans  is  probably  as  important  as 
any  other  feature.  In  the  first  two  or  three  pages  of  this  section  of 
the  report  "  pertaining  to  personal  or  .short-term  credit "  some  atten- 
tion was  given  to  the  length  of  time  for  which  farmers  need  to 
borrow.  It  was  pointed  out  that  loans  to  farmers  generally  mu.st 
extend  over  periods  from  90  days  to  1  year.  An  examination  of  the 
practice  of  credit  unions  in  Europe  shows  that  loans  generally  vary 
from  six  months  to  two  or  three  years.     It  is  true  that  more  than 


28  AGRICULTURAL   CREDIT. 

one-fifth  of  the  loans  are  on  current  account,  and  these  probably  do 
not  extend  for  as  long  a  period  as  six  months.  On  the  other  hand, 
more  than  half  of  the  loans  are  for  fixed  periods  and  extend  over 
a  longer  period.  In  exceptional  cases  loans  are  made  for  even 
longer  periods  than  for  three  years.  The  principal  safeguard  for 
the  success  of  rural  banlvs  when  loans  and  investments  are  under 
consideration  lies  in  the  very  character  of  these  primary  units.  The 
limited  area  of  operation  and  the  nature  of  rural  life,  together  with 
the  very  small  membership,  make  it  possible  for  each  member  to 
keep  an  eye  on  the  ailairs  of  his  fellow  member,  in  which,  moreover, 
he  is  directly  interested.  Indeed,  farmers  generally  can  easily  judge 
at  any  moment  of  the  solvency  of  their  neighbors  and  know  from  day 
to  day  just  how  their  neighbors  are  utilizing  the  money  obtained 
from  the  credit  union. 

A  common  characteristic  of  these  institutions  is  the  provision  that 
the  applicant  for  a  loan  must  declare  the  purpose  for  which  it  is  to 
serve.  In  some  cases  the  rules  are  so  strict  that,  if  a  member  applies 
for  a  loan  for  one  purpose  and  uses  it  for  another,  he  must  be  ex- 
cluded from  membership  for  a  period  of  time  and  upon  second 
offense  must  be  prohibited  from  ever  receiving  further  loans  for  any 
purpose.  This  rule  has  proved  very  efficacious,  according  to  most 
reports.  Variations  are  found  in  the  different  countries.  Thus,  as 
an  illustration,  in  Italy  loans  are  of  two  kinds  and  are  generally 
made  on  the  security  of  bills.  These  loans  are  frequently  distin- 
guished as  short-time  loans  extending  over  a  period  not  exceeding 
two  years  and  ordinarily  renewed  every  three  months.  The  second 
type  of  loan  frequently  extends  for  as  long  a  period  as  10  years,  and 
in  these  cases  is  conmaonly  repaid  by  installments.  Generally  speak- 
ing, the  interest  on  loans  for  long  periods  is  slightly  higher  than  the 
rate  on  short-time  loans  in  this  type  of  institution. 

PROFITS    AND    LOSSIS. 

The  purpose  of  credit  unions  is  not  to  make  commercial  profits, 
but  to  give  credit  to  members  on  favorable  terms.  As  generally 
found  throughout  Europe  this  system  does  not  even  admit  of  any 
distribution  of  dividends.  Where  this  rule  .is  in  complete  force,  all 
net  earnings  or  profits  are  carried  to  the  reserve  fund  or  used  in  the 
creation  of  institutions  of  public  utility  or  are  devoted  to  the  common 
good.  A  few  of  the  credit  unions,  however,  and  particularly  those 
which  have  a  material  share  capital,  provide  for  the  distribution  of 
dividends,  but  even  in  these  cases  rules  are  very  strict,  and  the 
dividends  never  exceed  the  maximum  rate  of  interest  charged  the 
borrower.  In  Austria  the  profits  are  never  paid  in  the  form  of  inter- 
est on  shares,  except  in  the  very  rarest  cases,  being  placed  in  the 
reserve  almost  always,  although  in  some  cases  small  amounts  are  de- 
voted to  the  common  good.  The  same  general  rule  applies  in  the  case 
of  Italy  and  other  European  countries. 

The  fact  that  no  dividends  are  paid,  or  that  dividends  when  paid 
are  insignificant,  does  not  mean  that  these  credit  unions  are  not 
prosperous.  Taking  Germany  again  as  an  illustration,  because  of 
the  tact  that  Germany  has  literally  thousands  of  these  societies,  we 
find  that  the  great  majority  close  their  business  each  year  with  a  re- 
spectable fund  designated  '"  net  earnings."  Out  of  the  12,797  ore(iit 
unions  referred  to  in  the  small  table  presented  above,  11,795,  or  more 


AGRICULrURAL    CREDIT.  29 

than  92  out  of  each  100,  closed  the  last  fiscal  year  for  which  reports 
are  available  with  net  earnings,  while  only  911,  or  7  out  of  each  100, 
declared  a  loss.  Ninety  institutions  closed  their  business  for  the 
year  with  a  balanced  sheet,  showing  neither  profit  nor  loss. 

If  we  take  the  total  result  of  all  these  credit  unions  under  con- 
sideration, the  net  earnings,  after  subtracting  losses,  amount  to  not 
far  from  $2,000,000  for  one  year,  or  almost  30  per  cent  of  the  share 
capital  of  these  institutions;  but,  as  noted  above,  this  is  not  declared 
in  the  form  of  dividends  on  the  share  capital,  and,  as  a  matter  of 
fact,  when  the  total  working  capital  is  considered,  these  profits  repre- 
sent only  about  0.4  per  cent,  showing  what  a  narrow  margin  the 
institutions  consider  safe. 

During  the  last  decade  reserves  have  rapidly  been  increased,  so 
that,  generally  speaking,  these  institutions  are  rapidly  establishing 
themselves  on  such  a  safe  basis  that  temporary  losses  are  taken  care 
of  from  reserve  funds  and  no  suffering  results.  The  small  difference 
between  the  interest  charged  on  loans  and  the  interest  paid  on  de- 
posits covers  the  management  expenses,  which  amount  to  very  little, 
since  the  general  rule  for  credit  unions  is  voluntary  or  gratuitous 
service.  A  successful  farmer  or  farmer's  son,  the  local  priest  or 
schoolmaster,  or  a  local  merchant  or  other  local  resident  acts  as  chief 
clerk  or  manager,  and  although  frequently  he  receives  rent  of  a  small 
home  and  possibly  some  little  gratuity,  salaries  are  not  generally 
paid.  Running  expenses  principally  include  an  insignificant  amount 
for  rental  and  cost  of  business  forms,  etc. 

CENTRAL  BANKS  AND  FEDERATIONS. 

These  small  credit  societies  or  banks  are  closely  related  to  each 
other  through  federations.  Central  banks  are  thus  provided  and  a 
system  of  connected  credit  and  banking  is  completed.  The  systems 
of  federation  are  clearly  described  in  other  Hterature  published  by 
the  commission  (S.  Doc.  No.  214,  63d  Cong.,  1st  sess.)  and  need  not 
be  further  given  in  detail  here. 

SUMMARY. 

A  careful  examination  of  the  descriptions  of  these  European  banks 
or  credit  unions  suggests  the  questions:  Ai'e  these  institutions  neces- 
sary in  this  country;  and  if  so,  should  they  be  provided  for  by  law, 
or  is  any  legislation  necessary  ? 

The  members  of  your  commission  feel  that  such  institutions  are 
necessary  in  many,  if  not  all,  country  communities  in  the  United 
States.  We  will  not  take  space  or  time  here  to  establish  this  posi- 
tion, believing  that  it  represents  the  unanimous  opinion  of  farmers  and 
of  unbiased  or  unprejudiced  observers  acc^uaintcd  with  the  problem. 

The  members  of  your  commission  are  of  the  opinion  that  credit 
unions  could  be  organized  in  almost  every  State  in  the  Union,  if  not 
in  every  State,  without  specific  legislation,  as  they  were  organized 
in  many  European  countries  and  as  they  have  already  been  launched 
in  several  American  States.  At  the  same  time  it  is  believed  that 
legislation  clearly  defining  credit  unions,  their  scope,  their  functions, 
their  methods  of  operation  and  limitations,  as  well  as  a  system  of 
inspection  or  supervision  of  these  institutions,  is  eminently  aesirable. 

The  members  of  your  commission  are  agreed  that  it  is  clearly 
within  the  power  of  the  different  States  to  pass  the  necessaiy  legis- 


30  AGRICULTURAL    CREDIT. 

lation,  and  we  desire  to  call  the  attention  of  Congress  to  the  specific 
laws  of  Massachusetts,  New  York,  Wisconsin,  and  Texas  providmg  for 
credit  unions  within  those  States. 

CONCLUSIONS  AND  RECOMMENDATIONS. 

The  minimum  capital  for  banks  organized  under  Federal  charter 
is  fixed  at  $25,000  in  the  national-bank  act.  The  Federal  reserve  act 
reenacted  this  provision  in  fixing  the  capitalization  for  member  banks 
.in  the  new  system.  It  follows,  therefore,  that  the  rediscount  privilege 
created  by  the  new  law  is  extended  only  to  banks  having  a  capital 
equal  to  that  of  national  banks  under  the  old  law. 

There  are  more  than  8,000  State  and  private  banks  in  the  United 
States  with  a  smaller  capital  than  that  required  by  law  of  member 
banks  in  the  new  system.  These  banks  are  located  mainly  in  small 
country  villages  and  do  business  either  directly  or  indirectly  Avith 
farmers.  No  reorganization  of  our  national  banking  system  can  be 
complete  and  just  to  the  agricultural  interests  which  deprives  or 
withholds  from  these  small  banks  participation  in  the  benefits  of  the 
Government  rate  of  discount. 

In  order  to  be  sure  of  its  ground,  your  commission  addressed  letters 
of  inquiry  to  several  hundred  of  these  small  State  and  private  banks, 
asking  if  it  was  their  purpose  to  increase  their  capital  so  as  to  join  the 
new  system;  and  if  not,  whether  they  would  join  were  the  capitali- 
zation to  be  reduced  to  $10,000.  The  replies  were  practicallj^  unani- 
mous. These  banlvs  will  not  increase  their  capital,  because  in  most 
instances  a  capital  of  $25,000  is  not  warranted  by  the  volume  of 
business  transacted  by  them;  this  minimum  is  excessive  for  banks 
located  in  thinly  settled  farming  districts.  For  this  reason,  then,  and 
not  from  any  spirit  of  hostility  to  it,  these  banks  will  not  enter  the 
new  system.  The  very  large  majority  of  those  replying  stated  that 
with  a  minimum  capital  of  $10,000  they  would  reorganize  and  be- 
come member  banks  of  the  regional  system. 

The  decision  of  these  country  banks  renders  it  certain  that  without 
amendment  to  the  national-bank  act  relatively  few  farmers  can  be- 
come patrons  of  member  banks  in  the  reserve  system.  Thus  the 
advantage  of  direct  Government  rediscount — which  is  the  rational 
basis  of  all  approved  systems  of  short- time  rural  credit  —will  bo 
largely  withheld  from  farmers  because  of  their  residence  in  thinly 
settled  parts  of  our  country.  Our  rural  population  is  justly  entitled 
to  receive  credit  direct  from  reserve  banks  in  tlie  same  degree  that 
urban  population  enjoys  this  advantage;  and  the  method  of  bank 
organization  should  bo  such  that  residents  of  country  districts  can 
successfully  overcome  the  disadvantages  of  their  environment. 

Your  commission  is  of  the  opinion  that  a  very  few  changes  in  the 
present  banking  systems  would  better  adapt  large  numbers  of  exist- 
ing small  banks  to  the  needs  of  great  numbers  of  farmers  and  farm 
laborers,  and  at  the  same  time  leave  these  institutions  unimpaired  to 
perform  the  commercial  functions  for  which  they  were  primarily 
established. 

We  do  not  present  a  bill  to  effect  the  changes  which  seem  to  us  to 
be  desirable  because  we  believe  that  the  Committees  on  Banking  and 
Currency  in  the  Senate  and  the  House  of  Representatives,  through 
many  years'  study  of  the  banking  laws  of  this  country,  are  better 


AGKICULTURAL    CREDIT.  31  ^ 

qualified  to  perfect  the  amendments  necessary  than  are  the  members 
of  our  commission.  We  content  ourselves  in  bringing  to  your  atten- 
tion some  of  the  more  important  details  involved. 

Having  all  of  these  facts  in  mind,  your  commission  is  of  the  opinion 
that  it  would  be  wise  to  provide  for  the  incorporation  of  banking 
associations  under  Federal  charter  with  a  capital  of  less  than  .'b_5,000. 
The  specific  recommendation  is  that  section  5138  of  the  national- 
bank  act,  as  amended  in  1900,  be  further  amended  to  provide  that 
banks  with  a  capital  of  from  $2,000  to  $25,000  may,  with  the  sanction 
of  the  Secretary  of  the  Treasury,  be  organized  in  any  place  the  popula- 
tion of  which  does  not  exceed  2,500  inhabitants. 

Your  commission  would  also  recommend  that  all  national  banking 
associations  with  a  capital  of  less  than  $25,000  should  have  a  dis- 
tinctive name,  such  as  National i?uraZ  bank,  and  in  this  event  provision 
should  be  made  prohibiting  all  other  banking  associations  organized 
under  either  State  or  National  law  from  using  the  distinguishing  word 
"Rural"  as  a  part  of  their  title. 

It  is  the  judgment  of  your  commission  that  in  the  provision  for 
these  national  rural  banks  two  types  should  be  recognized  by  an 
arbitrary  line  of  demarcation  based  upon  the  amount  of  capital. 
We  therefore  recommend  that  national  rural  banks  having  a  capital 
of  less  than  $10,000,  divided  into  shares  of  small  par  value,  be  per- 
mitted to  do  business  only  wnth  members  or  their  ow^n  shareholders, 
unless  in  the  judgment  of  Congi^ess  they  should  be  given  the  right  to 
accept  deposits  from  a  wider  clientele.  This  principle  has  been  con- 
clusively demonstrated  in  European  experience  and  can  be  safely . 
accepted.  If  the  privileo;e  be  given  to  accept  deposits  from  other 
than  shareholders,  it  might  be  well  to  increase  the  degree  of  liability 
above  that  of  double,  or  to  permit  such  liability  to  be  accepted  volun- 
tarily by  the  shareholders.  The  cooperative  features  suggested  in 
the  report  pertaining  to  small  farm-land  banks  could  be  adopted  to 
advantage  here.  Wriile  under  this  form  of  organization,  viz,  that  of 
limited  banking  power  and  smnll  capitalization,  these  banks  should 
be  given  the  privilege  of  depositing  any  or  all  of  their  moneys  in  the 
postal  savings  banks.  Your  commission  has  satisfied  itself  that  there 
are  no  administrative  difficulties  to  be  encountered,  and  this  privilege 
is  freely  extended  in  European  countries.  It  is  not  necessary  to 
specify  the  manifest  advantage  which  this  privilege  will  give  to  a 
small  bank  doing  a  limited  business  in  a  small  country  village,  which 
is  the  natural  home  of  this  class  of  banks.  On  the  other  hand,  it  is 
our  opinion  that  national  rural  banks  with  a  paid  up  capital  of  $10,000 
and  less  than  $25,000  should  have  the  right  to  do  a  full  banking  busi- 
ness under  the  national-bank  act,  except  holding  a  membership  in 
the  Federal  reserve  system.  This  provision  of  law  would  make  it 
possible  for  small  private  and  State  banks  to  reincorporate  as  national 
rural  banks. 

Authority  to  incorporate  national  rural  banks  with  a  capital  less 
than  $25,000  would  in  itself  not  be  sufficient,  since  these  small  insti- 
tutions would,  under  the  present  banking  laws,  be  debarred  from  the 
Federal  reserve  system.  It  is  the  judgment  of  vour  commission  that 
the  best  way  to  overcome  this  difficulty  would  be  to  amend  section 
5133  of  the  national-bank  act  by  providing  for  the  formation  of 
national  banks,  with  the  approval  of  the  Secretary  of  the  Treasury, 
by  any  number  of  these  rural  banks,  "not  less  in  any  case  than  five," 


82  AGEICULTURAL    CREDIT. 

and  having  an  aggi'egate  paid  up  capital  of  not  less  than  $50,000. 
In  this  connection  it  doubtless  would  be  necessary  to  require  all  rural 
banks  forming  a  national  bank  to  be  in  one  and  the  same  Federal 
reserve  district,  and  to  stipulate  that  the  national  bank,  when  formed, 
should  become  at  once  a  member  of  the  reserve  bank  in  the  district 
in  which  it  was  located.  In  the  formation  of  a  national  bank  by  rural 
banks  it  would  probably  be  desirable  to  require  them  to  hold  60  per 
cent  of  the  capital  stock  of  such  member  bank,  thus  leaving  not  to 
exceed  40  per  cent  for  popular  subscription.  In  this  way  country 
communities  and  agricultural  interests  could  participate  to  the  best 
advantage  in  the  rediscount  privileges  provided  by  the  Federal  re- 
serve act. 

Students  of  this  subject  wdl  recognize  in  these  suggestions  the  ele- 
ments of  the  French  system  of  rural  banks,  which  is  the  latest  system 
to  be  devised  and  which  has  been  tested  sufficiently  by  actual  expe- 
rience to  prove  its  efficacy.  Happily,  these  principles  adapt  them- 
selves very  easily  to  our  reserve  system,  and  in  our  opinion  would 
prove  of  large  benefit  to  our  rural  population.  We  are  aware  that 
France  supplements  the  rediscount  advantage  by  the  deposit  of  con- 
siderable sums  of  pubhc  moneys  in  these  banks  to  be  loaned  exclu- 
sively to  farmers.  The  Government  of  France  is  also  very  friendly 
to  the  agricultural  interests  of  the  nation  and  encourages  a  hberal 
pohcy  by  the  Bank  of  France  in  extending  rediscount  privileges  to  the 
farm  paper  held  by  these  small  banks.  The  commission  feels  justi- 
fied in  assuming  that  the  Federal  reserve  act  will  be  administered  in 
a  similar  spirit  toward  our  agricultural  interests;  and,  while  making 
no  recommendations  to  that  effect,  the  commission  records  its  con- 
viction that  in  some  sections  of  the  United  States  either  aid  of  similar 
character  hj  our  Government  will  be  necessary  or  founders'  shares 
wiU  have  to  be  purchased  by  men  who  are  inspired  by  altruistic 
motives,  if  personal  loans  are  to  le  speedily  extended  to  farmers  in 
aU  sections  of  the  Repul)hc  at  fair  rates  of  interest. 

Banking  laws  have  been  unfair  to  rural  industry  l^ecause  farmers 
have  been  widely  scattered  and  not  in  a  })osition  to  use  them,  and 
because  no  special  type  of  institution  has  been  provided  in  the  past 
to  care  for  their  special  needs.  As  a  result  these  laws  have  militated 
against  the  growth  of  industrial  democracy,  and  unless  supplemented 
will  destroy  the  fruition  of  the  new  freedom  to  a  large  part  of  our 
industrial  population. 

Your  commission  believes  that  it  is  also  within  the  power  of  Con- 
gress to  pass  laws  pro\dding  for  credit  unions  or  cooperative  credit 
associations  and  making  them  fiscal  agents  of  the  National  Govern- 
ment; but  the  conditions  of  agriculture  differ  so  widely,  the  needs  of 
farmers  vary  so  greatly,  and  the  status  of  the  different  classes  of 
people  in  rural  communities  are  so  unlike,  that  it  is  our  opinion  that 
such  laws  where  called  for  can  best  be  enacted  by  the  various  State 
legislatures. 

Duncan  U.  Fletcher,  Chairman. 

Thomas  P.  Gore. 

Ralph  W.  Moss,  Vice  Chairman. 

Harvie  Jordan. 

John  Lee  Coulter,  Secretary. 

Kenyon  L.  Butterfield. 

Clarence  J.  Owens. 

TJHIV6KS1t9  of  CAUFORWa 

I    .       :eles 

L.M.K  ^KY 


'^'/V      000187  795^ 


credits  and  agricul 
tural   cooperative 
Qi^ani^  atigns^n 

European  countriee*" 
Agricultural  cre^dit. 


Msia.- 


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U58a 


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